RJA #11: Argument

       Claim:
  Deregulation of the financial and banking sectors, leading to the increased use of complex financial instruments, had a major role in causing the crash in 2008.
      (page xviii of the Financial Crisis Inquiry Report)


Reason 1:  The FCIC concluded that failures in regulation and supervision led to the collapse of the financial markets (Financial crisis inquiry report page xviii)
    Therefore, the majority of the commission whose job it was to investigate the crisis believes that deregulation of the financial markets had a key role in causing the economic collapse in 2008. They also stated that the passage of The Commodity Futures Modernization Act of 2000 effectively eliminated oversight by both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). This elimination of oversight as well as the changing of bankruptcy laws in 2005 caused a boom in the derivative market.
     (Financial crisis inquiry report page 48)


Reason 2: The unregulated  use of Derivatives as an investment tool contributed greatly to the instability of the financial system (Financial crisis inquiry report pagexxiv).
   As stated in reason 1, the derivative market boomed in the few short years between 2005 and 2008. Although a short time period, the effects of this unregulated sector of the market caused great damage to the entire economy.  To put it into perspective, in 2000, the derivative market value was $3.2 trillion, while in 2008, the market value was $20.3 trillion. The problem with the derivative market is that little or no collateral is needed to make very risky transactions usually involving a lot of money. 
    (Financial crisis inquiry report page 48 and 49)


Reason 3: The financial crisis could have been averted had the big mortgage banks been scrutinized by  more prudent lending standards (Financial crisis inquiry report page xix and page xxiii).
     During the years of the housing boom, from the early 2000's to 2008, mortgage lenders began utilizing more and more lenient standards for giving people mortgages. The "safe mortgage", the 30 year fixed rate with 20% down, was all but abandoned in favor of mortgages that were easier to get; no need for documentation, down payment, or a great FICO score, there is a mortgage for you. On top of the riskier borrowers, banks were betting that home prices would never decrease, and had bet a lot. (Financial crisis inquiry report page 4-6)


Objection 1: The deregulation of the financial markets and the use of derivatives were not the cause of the financial crisis (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 443).
     It was a key factor, because with regulations of the derivative market, rampant speculation and banks like Lehman Brothers could have never leveraged 30 to 1 with investors' money. 


Objection 2: The cause of the financial crisis was, in fact, the proliferate of subprime mortgages in the years leading up to 2008 (Dissenting view of Peter Wallison, FCIC, Financial Crisis Inquiry Report, page 444).
   I agree that this is one very important cause of the collapse as well, but not the only one.