Five Years Later, Obfuscation and Wrongheadedness About the Financial Crisis Persist

Abstract

This paper covers some common misconceptions about the 2008 financial crisis as evidenced in some of the provisions of the Dodd-Frank Act. Also lamentable is the mainstream media’s silence about government’s role in causing the calamity by forcing banks to lower mortgage underwriting standards to promote home ownership among lower income Americans. Regulatory reform enacted through the Dodd-Frank Act, while effective in part, is overdone. To its credit the legislation establishes sound lending standards, stricter capital, leverage and liquidity requirements, and rating agency oversight. Indeed, the risk of contagion inherent in the global interconnectedness of financial institutions is real and should be mitigated by these measures. But proscriptions against private derivatives contracrts, proprietary trading, and certain consumer lending practices throw out the baby with the bathwater, as they were not material factors in the creation of the financial crisis. In fact, such restrictions undermine risk management and liquidity in the economy. Sound loan underwriting and an appropriate capital buffer, properly enforced, should be enough to prevent another crisis. However, government continues to aggressively pursue its affordable housing policy through an insolvent FHA that subverts new regulation. Without constraints on a contravening political agenda, all bets are off. Mass media’s refusal to acknowledge government’s culpability for the financial crisis while it continues to sanction imprudent lending contributes to such an eventuality.