The Challenge of Optimism and Complexity : Inadequately Addressed by the FCIC’s Report

There are some notable themes within the report of the Financial Crisis Inquiry Commission (FCIC) on the recent financial crisis in the United States. One is that the crisis was avoidable; the other is that there were many causes for the crisis. The causes included: eroded mortgage lending standards; monetary policy of the Federal Reserve; increased capital flows from abroad; the originate-to-distribute model of mortgage origination; failure of regulators to respond satisfactorily; inadequate due diligence by investors; failure of firms to adhere to underwriting standards; and the failure of rating agencies to issue accurate ratings. This article suggests that these were proximate causes of the crisis and symptoms of more fundamental issues. Underlying these causes was something much simpler - and much harder to address when determining measures to prevent such a crisis. It appears that there was an overabundance of optimism in a complex economic environment. This suggests that the actors who created the financial crisis were not acting culpably as much as they were behaving irrationally or imprudently. This does not suggest they should have acted the way they did, or could not have acted otherwise. The FCIC is correct that the crisis was avoidable. But the real question is whether reasonable people should have been expected to act in a way to have avoided the crisis. The FCIC's report accurately framed the events leading to the crisis. However, failing to address the reasons behind the proximate causes may cast all the actors in the crisis in an overly harsh light and will impede any attempts to reduce the chances that a similar crisis will recur. And to the extent the actors creating the crisis feel mis-assessed and unfairly blamed, they will be inclined to push back against beneficial and desirable regulation proposals