With the clarity of time we can look back at the brink of the collapse that hit us just prior to the last national election.  In the midst of the collapse we were stunned and angry, and tended to blame the party in power. Although the Democrats had controlled both houses of Congress since 2006, the disaster took its bigger toll on the Republicans.

While the roots of this collapse extend back through many administrations of both parties, it is important to know what did not cause this as well.

Some blamed the deficits, others blamed deregulation, but many just saw the main cause as unbridled greed.  I contend that while there were deficits, and there was greed, none of these played a critical role in fomenting this crisis.

As Thomas Sowell noted, blaming this crisis on greed is like blaming an airplane crash on gravity.  It is true but it doesn’t really explain anything. Worse if we just blame the undeniable then there is no need to examine human error, design flaws, or study ways to keep it from happening again.

Greed has been with us since the dawn of man. Why did it decide to show its ugly face in September of 2008? Greed is encumbered by the limits of a rational society and in a capitalist system it is encumbered by competition.  I may want to charge $2,000 a ton for steel, but competition keeps me from charging what I want, and even forces me to keep my payroll and expenses in line.

Our government tries to contain the fear of greed with regulations. If we are to blame greed we must face the failure of our regulations, or we may even need to face the possibility that our regulations fostered greedy behavior.  The second most common blame was the laissez faire attitude that had fostered deregulation of the financial markets.   Usually this is directed at the repeal of the Glass Steagal Act which separated lenders from investment banks. This law was repealed under The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, which was signed by President Clinton.

But other nations, notably Canada, also repealed similar legislation and they did not experience the financial crisis we did. But Canada also did not suspend prudent lending standards to force the spread of home ownership beyond its natural market.

Nor was deregulation the norm under George W Bush. In fact just the opposite was true.

Elliot Spitzer noted that we did not suffer from the lack of regulators or regulations. There were plenty to do the job, but they seem to lack the courage and the will to do the job.  We needed better regulations, not more of them.  In many cases the regulated industries such as Fannie Mae  (exempt from SEC and FDIC regulation) spent enormously on lobbyists and campaign contributions to thwart efforts to regulate them.  It was successful for them.

The biggest recipient of campaign contributions from AIG was Barak Obama. The biggest recipient of the PAC assembled by the largest mortgage lender for Fannie Mae, Country Wide Finance,  was Barak Obama. The largest recipient of campaign funds from Fannie Mae was ….. yes, Barak Obama. The second largest recipient in these three cases was Chris Dodd, Chairman of the Senate Banking Committee.

The deficits which seemed so irresponsible at the time now look like pocket change.  Deficits do matter but it depends how long they last, how large they are relative to GDP, prevailing interest rates, and what the deficits are spent on.  Personal debt spent on a house or investment equipment may seem prudent, the same debt spent on a boat or jewelry would not.

While the debt incurred under George Bush was arguably bad, it was not a critical factor in causing the meltdown.  We incurred controversial debts under Ronal Reagan and incurred little repercussion from the financial industry.

Bubbles are nothing new and may just be a part of the pricing mechanism. The Federal Reserve was created to bring stability to our financial system. It first test was the Great Depression of 1929, and it failed miserably.  Nearly 80 years later with the value of the dollar down 95% and in the middle of the worst financial crisis in our adult lives, we should ask if it is part of the problem.

Eliminating commonly perceived causes should help us focus on solutions that will work. If we delude ourselves into blaming greed, deficits, and individual demonas we risk designing solutions that not only will not work, but will like make the problem worse

“Fannie and Freddie played the political game even more fiercely than their opponents, spending millions of dollars on armies of lobbyists on Capitol Hill. Each company was a revolving door for the powerful in Washington- both Republican and Democrat. Newt Gingrich and Ralph Reed, among others, worked as consultants for Fannie or Freddie; Rahm Emanuel was a board member of Freddie.”

“By the 1990’s, Fannie’s chief executive could boast, without much exaggeration, that “we are the equivalent of a Federal Reserve system for housing.”  At their pinnacle the two mortgage giants- neither of them and originator of loans- owned or guaranteed some 55 percent of the $11 trillion U.S. mortgage market.  Beginning in the 1980’s, the two companies also became important conduits for the business of mortgage- backed securities.  Wall Street loved the fees it collected from securitizing all kinds of debt, from car loans to credit card receivables, and Fannie’s and Freddie’s portfolio of mortgages were the biggest honeypot around.”

“But in 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages. The move was presented in the press as a way to put  homes within the reach of countless Americans, but providing loans to people who wouldn’t ordinarily qualify for them was an inherently risky business.”

From Too Big To Fail by Andrew Ross Sorkin

Wall Street’s financial leaders have been paraded before Congress to explain their efforts to restore stability to our financial system. Obama has turned on the populist spigot to demonize Wall Street to justify bigger taxes and fees and hip shot regulation.

Wall Street deserves the scrutiny and reform is needed.  Yet this fiasco was as much a government failure.  Fannie Mae was exempt from regulation by the SEC, FDIC and the Fed.  When Congress was solidly warned about excessive risks taken by the Fannies,they rejected calls to increase oversight, largely along party lines. Little protest is heard from the halls of Congress over some of the huge bonuses paid to Frank Raines and others at Fannie Mae while the system was imploding.

Some recent regulations such as the mark to market rules made this crisis much worse than it would have otherwise been.  Other regulations such as control  of derivatives  by the Commodities Futures Trading Commissions were removed (under Clinton) at a pivotal time. The Fed ’s monetary policy was also a factor.

A hearing to truly understand what happens and what needs to be done would have our Congressmen on the other side of the microphone.

We clearly need financial reform. Yet Obama’s reckless, populist, anti-business pronouncements only serve to harden the prevailing attitude that business growth and job generation is just too risky.

Financial reform should be thoroughly vetted and discussed in the appropriate House and Senate committees.  Piecemeal pronouncements only add to the uncertainty that is killing this economy. The 550 point drop in the Dow last week following his pronouncement should be of concern, although it is never totally clear what moves the market.

The objective is not just to reduce risk, but to isolate it.  We want to protect critical banking and credit functions from the raw speculation.  Yet it is hard to return to the days before the Glass-Stegall bill, separating banking and investment activities, was overturned under Clinton.

There is no substitute for better regulations.  Higher capital requirements  to reduce leverage and better control of private contracts and derivatives that increase leverage and systemic risk are likely to come.

But let them come after the careful deliberation and consideration of the necessary functions our financial system provides.  Reckless announcements from the president in the critically weak economy we still face is destructive and counterproductive.

There are those who see our financial problem as a moral failure. In one sense it is, but not in the sense those who wish to frame it in moral tones believe.

To blame greed for the meltdown is simplistic and irrelevant. Greed has been with us forever. Why would it appear in its ugliness now?

I would say that our economic collapse was the fault of a moral supremacy that ignored sound economic principles and common sense.  In an effort to encourage home ownership for the poor, the government demanded that prudent lending standards be forced out of the system. To assure a market the government through Fannie Mae guaranteed mortgages and ridiculous financial instruments to feed the market.

When alarms were being sounded the regulators and legislators were being hounded with political pressure from lobbyists for the very firms they were regulating. Chris Dodd, Hillary Clinton and Barak Obama were among the largest recipients of campaign funds from Fannie Mae.  Barney Frank and many others loudly protested those who warned of a problem, insisting that these programs providing housing for the lower income were somewhat sacrosanct.

It was the unwillingness to understand the limits of government to fulfill our moral wishes that fed this mania.  It was our pursuit of moral justice through government force that led taxpayer funded ACORN to pressure banks to make high risk loans to those who otherwise would not have qualified.

It was not greed or the absence of morality that caused this disaster; it was the ignorance of basic economic principles and the belief that the government can create wealth by making promises it can’t fulfill and that it can erase risk by ignoring it.  In its malfeasance it made the poor worse off and destroyed equity value for millions of the middle class.

If there is a moral failure it is that the government refused to accept its limitations, and that the voters wanted a government that will promise them everything.

The greed of those who wanted a modest house they could not afford caused us more damage than the titans on Wall Street who found a way to get rich delivering the voters their delusion.