"We conclude this financial crisis was avoidable." That's the key sentence in the Financial Crisis Inquiry Commission's final report, issued yesterday. It's the most controversial sentence, too. That's why the commission issued three final reports: a majority report written by the Democratic-appointed members, and two dissenting reports written by Republican-appointed members.
The majority report concludes: "The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. … While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred."
The main dissenting view says the majority's conclusion is too simplistic because it "largely ignores the global nature of the crisis." For example, the credit bubble happened in the United States and Europe. "This tells us that our primary explanation for the credit bubble should focus on factors common to both regions."
Housing bubbles happened in countries that don't have a U.S.-style mortgage securitization system, the dissenters point out. They're not so sure that the financial crisis was avoidable.
Another dissent, written by Peter Wallison of the American Enterprise Institute, blames the financial crisis on regulations that were drafted to support widespread homeownership "through an intensive effort to reduce mortgage underwriting standards." The funniest part of this dissent is its accusation that the majority sought "only the facts that supported its initial assumptions," which is quite a brazen statement, coming from an AEI fellow who --surprise! -- blames the government for everything.
To boil it down, you have one minority report that says the global financial crisis could not have been prevented unilaterally by the United States. You have another minority report that says the crisis could have been prevented had Congress and the regulators simply stepped out of the way. And there is a majority report that says the crisis was avoidable, but it takes more than 500 pages to explain how.
Me? I think the crisis was avoidable, and I believe that one relatively simple circuit breaker could have prevented it. The circuit breaker would work like this: When house prices rise at a certain rate (say, at a rate of more than 5 percent a year), then bigger down payments should be required. The faster the price growth, the bigger the minimum down payments.
In Florida, house values were rising more than 20 percent a year at the peak of the bubble. At that time, many buyers -- I believe a majority of them -- were buying houses with zero down, using 80/20 piggyback loans. If those buyers had been required to scrape up enough cash to put 20 percent down, the speculative bubble would have stopped inflating.
And, I believe, house price growth would never had approached the 20 percent-a-year level, had buyers been required to put 10 percent down when prices were growing at 10 percent a year.