Getting to the bottom of things

What – or who – caused the crisis? Slate offers not one but 15 answers to that question here. But if you’d like a more official response, you might like to keep an eye on the Financial Crisis Inquiry Commission (FCIC) in the United States, which is due to begin public hearings this week. The ten-member commission was set up by Congress with a sweeping mandate to investigate the causes of the crisis – everything from the possible role of fraud and abuse in the financial sector to the way bankers are paid.

There are precedents for this sort of probe. In the early 1930s, the U.S. Senate’s Pecora Commission investigated the causes of the Great Depression, and “unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash”, according to Ron Chernow. That investigation had a long-term impact on the U.S. financial sector, leading to the establishment of the Securities and Exchange Commission (SEC) and the separation of commercial and investigation banking.

Whether the FCIC will have the same impact remains to be seen, but its chairman, Phil Angelides, has made it clear that he wants the commission to ask – and answer – some tough questions. “You have millions of people unemployed, millions have lost their homes, and Wall Street is having a record year with record profits and record bonuses,” he told ABC News. “People want to understand why.” What questions should the commission ask? The New York Times and The Huffington Post have some suggestions.

The Commission is due to report by mid-December 2010, but members have indicated they plan to post important findings on their website (under construction) before then.

Subsidising Pollution?

How can we reduce fossil fuel use and make the switch to clean energy?  Debates on fossil fuel dependence and its consequences for the environment have reached a crescendo as COP15 nears its deadline.  But did you know that governments still subsidize the use of fossil fuels?  Helen Mountford of the OECD Environment Directorate, Peter Wooders of the IISD and Dr. Fatih Birol of the IEA explain the importance of dealing with these contradictory policies.

Useful links:

OECD and COP15
The IISD Blog
COP15

The roots of a crisis­­

To kick off our new site, we will publish From Crisis to Recovery, a new book from the OECD Insights series here on the blog, chapter-by-chapter.   This book traces the roots and the course of the crisis, how it has affected jobs, pensions and trade, while charting the prospects for recovery.

These chapters are “works in progress” and their content will evolve.  Reader comments are encouraged and will be used in shaping the book.

By way of introduction…

The events of 2008 have already passed into history, but they still have the power to take our breath away. Over a matter of months, a succession of earthquakes struck the world’s financial system – the sort of events that might normally happen only once in a century.

In reality, the warning signs were already there in 2007, when severe pressure began building in the subprime securities market. Then, in March 2008, the investment bank and brokerage Bear Stearns collapsed. More was to come. Early in September, the United States government announced it was taking control of Fannie Mae and Freddie Mac, two huge entities that underpin mortgage lending in the U.S. Then, in the middle of that month, came news of the collapse of investment bank Lehman Brothers. A fixture on Wall Street, Lehman had been a home to the sort of traders and dealers that novelist Tom Wolfe once dubbed “masters of the universe”. Around the same time, another of Wall Street’s legends, Merrill Lynch, avoided Lehman’s fate only by selling itself to the Bank of America.

It wasn’t just investment banks that found themselves in trouble. The biggest insurer in the U.S., American Insurance Group, teetered on the brink of failure thanks to bad bets it had made on insuring complex financial securities. It survived only after billions of dollars of bailouts from Washington.

How did the stock markets react? In New York, the Dow Jones Index fell 777 points on 29 September, its biggest-ever one-day points fall. That was a mirror of wider fears that the world’s financial system was on the brink of meltdown. The mood was summed up on the cover of The Economist, not usually given to panic, which depicted a man standing on the edge of a crumbling cliff accompanied by the headline, “World on the edge”.

What happened? Find out by reading the full chapter here The Roots of a Crisis