The FCIC Report: Sound and fury, signifying nothing

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I’ve just wast­ed a per­fect­ly good day read­ing the report of the Finan­cial Cri­sis Inquiry Com­mis­sion–the body appoint­ed by Con­gress alleged­ly to inquire into what caused the Finan­cial Cri­sis.

What it has deliv­ered reads more like an unedit­ed the­sis by a jour­nal­ism stu­dent (who is about to receive a “C” grade). There are plen­ty of quotes, lots of detail, some nice sec­tion head­ings and a few pret­ty graphs, but absolute­ly no analy­sis wor­thy of the name.

And I thought the WEF report on cred­it was bad… At least that report actu­al­ly con­sid­ered the lev­el of cred­it and the role of cred­it in a mar­ket econ­o­my. It had sim­plis­tic assump­tions and reached sim­plis­tic con­clu­sions, but at least it engaged with the top­ic, and its attempt to devise met­rics for mea­sur­ing the degree of cred­it stress deserved some praise.

But this FCIC report was sim­ply a waste of time. All I got out of the entire tome was one good anal­o­gy about why the rat­ings agen­cies (Moody’s and the like) got the prob­a­bil­i­ties of defaults by mort­gagors so bad­ly wrong:

In rat­ing both syn­thet­ic and cash CDOs, Moody’s faced two key chal­lenges: first, esti­mat­ing the prob­a­bil­i­ty of default for the mort­gage-backed secu­ri­ties pur­chased by the CDO (or its syn­thet­ic equiv­a­lent) and, sec­ond, gaug­ing the cor­re­la­tion between those defaults—that is, the like­li­hood that the secu­ri­ties would default at the same time.

Imag­ine flip­ping a coin to see how many times it comes up heads. Each flip is unre­lat­ed to the oth­ers; that is, the flips are uncor­re­lat­ed. Now, imag­ine a loaf of sliced bread. When there is one moldy slice, there are like­ly oth­er moldy slices. The fresh­ness of each slice is high­ly cor­re­lat­ed with that of the oth­er slices. As investors now under­stand, the mort­gage-backed secu­ri­ties in CDOs were less like coins than like slices of bread. (p. 145)

But that’s about it: oth­er­wise there’s lots of detail, and almost no insights worth even com­ment­ing upon. To my sur­prise, I found myself sid­ing with the dis­sent­ing mem­bers of the Commission–not because their analy­sis was much bet­ter, but because they had the hon­esty to describe the major­i­ty report as sim­ply use­less. As one of the sev­er­al dis­sent­ing reports put it:

The major­i­ty’s almost 550-page report is more an account of bad events than a focused expla­na­tion of what hap­pened and why. When every­thing is impor­tant, noth­ing is. (p. 414)

The same dis­sent­ing report makes some sen­si­ble state­ments about what the Com­mis­sion should have con­sid­ered, and then con­cludes:

These facts tell us

• that our expla­na­tion for the cred­it bub­ble should focus on fac­tors com­mon to both the Unit­ed States and Europe,
• that the cred­it bub­ble is like­ly an essen­tial cause of the U.S. hous­ing bub­ble, and
• that U.S. hous­ing pol­i­cy is by itself an insuf­fi­cient expla­na­tion of the cri­sis.
• Fur­ther­more, any expla­na­tion that relies too heav­i­ly on a unique ele­ment of the U.S. reg­u­la­to­ry or super­vi­so­ry sys­tem is like­ly to be insuf­fi­cient to explain why the same thing hap­pened in parts of Europe. This moves inad­e­quate inter­na­tion­al cap­i­tal and liq­uid­i­ty stan­dards up our list of caus­es, and it moves the dif­fer­ences between the reg­u­la­tion of U.S. com­mer­cial and invest­ment banks down that list. (p. 416)

That’s about all that is worth­while in this entire report. All it amounts to is a jour­nal­is­tic overview of the events from ear­ly 2005 till late 2010. It’s rea­son­able as such–I’m sure some resource­ful if unimag­i­na­tive Hol­ly­wood hack writer could mine the doc­u­ment for a movie or two  about the cri­sis. But as such it’s hard­ly new (Hank Paulson’s insid­er account of the cri­sis in “On the Brink” was far more time­ly and cer­tain­ly more excit­ing) and cer­tain­ly not worth the pub­lic dol­lars that would have been expend­ed on it.

If this is the best the US Con­gress can do, then the USA can look for­ward to many more years of this crisis–and many more crises in future.

If you do have to read the report, then please don’t waste any mon­ey buy­ing it–just down­load the PDF instead (I’m sure the hard­back will be in a remain­der bin at a near­by book­shop in the very near future).

Now I’ll get back to a worth­while use of my time–finishing the sec­ond edi­tion of Debunk­ing Eco­nom­ics. In clos­ing, to make up for your time wast­ed read­ing this, here’s the verse in which that won­der­ful phrase “Sound and fury sig­ni­fy­ing noth­ing” entered the Eng­lish lex­i­con: Act 5, Scene 5 of Shake­speare’s Mac­beth, when Mac­beth is told that Lady Mac­beth is dead:

She should have died here­after;
There would have been a time for such a word.
To-mor­row, and to-mor­row, and to-mor­row,
Creeps in this pet­ty pace from day to day
To the last syl­la­ble of record­ed time,
And all our yes­ter­days have light­ed fools
The way to dusty death. Out, out, brief can­dle!
Life’s but a walk­ing shad­ow, a poor play­er
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Sig­ni­fy­ing noth­ing.