Thursday, January 27, 2011

Financial Crisis Inquiry Final Report Available

The Financial Crisis Inquiry Commission released its Final Report on the Causes of the Financial Crisis.

The 660 plus page report with dissenting commissioners' views is available free;
from the Commission here;
from GPO here;
and from my upload on Scribd here.

My personal biases are towards the scientific method, i.e. reproducibility. Since whatever causes presented in the report as an explanation for the financial crisis are not testable, I do not put much faith in the explanations in the report. Our state of financial, banking and economic knowledge has not changed since before the crisis. We did not understand the warning signs of a impending financial crisis before and we do not understand them any better now after the crisis.

The report is more a finger pointing, conventional wisdom, political document about the crisis than scientific inquiry into causes. The conclusions are based on observations without a reliable theory to explain any of the conclusions or causalities. The report fills a human and political need to find causes and blame even when the state of our knowledge does not lend itself to the task.

These types of inquiries remind me of the old beliefs that life could spontaneously occur in meats because maggots would suddenly appear on meat as it was left out in the open. It was later discovered that flies laid their eggs on the meat and the new born flies became larvae, maggots, before they matured into flies. When meat was placed in jars, covered with cloth, etc., no maggots appeared.

The report mentions many banking, financial, and regulatory things that existed before the crisis. Prior existence does not mean it caused the crisis, even if the logical connection exists in the minds of the report commission.

The report is more about closure than it is about finding causes. Unfortunately, it will be used as the basis to propose ineffective new regulations and laws.

1 comment :

  1. "it will be used as the basis to propose ineffective new regulations and laws"

    Unfortunately, though it contains much valuable information and analysis, the report does not identify the fundamental cause of the crisis, namely that the bank regulator, primarily the Basel Committee, with amazing hubris, took upon itself to act as the risk-manager of the world.

    In effect, when the Basel Committee set capital requirements for banks imposing risk-weights based on its arbitrary perception of the risk reflected by the credit ratings issued by the credit ratings agencies, it de-facto determined what was to be ground zero for most other risk-managers.

    In effect, it was precisely those capital requirements for banks that tempted too much the banks to enter excessively and with minuscule equity life vests the triple-A waters, where they drowned.

    In effect, those arbitrary capital requirements cause an odious and regressive discrimination requiring from those perceived as risky and who already pay higher interests rates, to carry an inordinate weight of the capital requirements of banks that is needed to support the system; effectively subsidizing those perceived ex-ante as having “low risks” and who therefore already pay lower interest rates.

    In effect, from a regulatory point of view those capital requirements based on perceived risks, are plain silly, knowing that what causes systemic disasters in banking are always those risks that have not been perceived or are ignored by the collective.

    It is very urgent to throw out the paradigm of capital requirements for banks based on perceived risk of default, which only distorts the markets and serves no purpose at all. But that will not happen until the problem is fully understood, and sadly it looks like, with this report, that the world missed another good opportunity.

    Per Kurowski
    A former Executive Director at the World Bank (2002-2004)