“Fannie Mae Made Me Do It”

By Simon Johnson.  This post is the first few paragraphs of a column now available at Project Syndicate.

The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?

In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many people into taking out subprime mortgages that they could not afford.

This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?

Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January.  (The slides are on his MIT website.)

To read the rest of this column, please click here or cut and paste this address: http://www.project-syndicate.org/commentary/johnson16/English.

Drill, Baby, Drill: Reviewing The Advice To The Financial Crisis Inquiry Commission

The NYT has a collection of potential questions for the Financial Crisis Inquiry Commission (FCIC) to ask four of the country’s leading bankers today.

Some of the proposed questions are technical or even philosophical.  These are interesting, but hardly likely to be effective.

I like where Yves Smith is going: what kind of bonuses were paid for trades on which firms ultimately lost money?  Bill Cohan and David Walker, coming from very different perspectives, are also pushing on issues related to compensation structure in general and bonuses in particular.

The real issue, of course, is the nature of the risk system itself.  But this is a big abstract question – and not suited to these kind of hearings.  The Commission needs to find concrete issues that people can relate to much more broadly, and bonuses are very much in the line of fire.  The fact that the 2009 bonuses are already in the works – and eerily, but not coincidentally, parallel to the 2007 bonuses – is going to make this hard for the bankers to spin.

Serious debate is just beginning – drill down into how bankers at Too Big To Fail firms really pay themselves, and you will be amazed at what you start to see more clearly.

By Simon Johnson