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Too much mediocre financial journalism on the crisis

This is why I don’t watch TV news much anymore, and why I only read a few publications. TIME Magazine blogger Stephen Gandel has an article about the Financial Crisis Inquiry Commission, and I take serious exception to his article. Here’s why.

You can read the full article here to know what I’m talking about: What Caused the Financial Crisis? Still 22 Possibilities.

I will give relevant quotes, with my commentary below.

The head of the Financial Crisis Inquiry Commission, Phil Angelides, stopped by the office this morning. I think the idea of this commission is a very good thing.

Ok, why?

I continue to feel that something wrong happened in the run up to the financial crisis that was not just the result of a group miss-think but actual bad actors, and without a commission with subpoena power to get to the bottom of things it is likely that we will never have real regulatory reform and will probably start seeing CDOs of CDSes (you don’t want to know what these things are, but look it up if you like) again real soon.

I don’t want to know what CDOs and CDSs are? If I don’t want to know that, then I am unqualified to be having this discussion. We need to elevate the level of discourse on the crisis beyond the “Goldman Sachs is the root of all evil” trope. Secondly, I’d argue that seeing CDSs (credit default swaps) again is not necessarily a bad thing. Capital requirements are needed, but you do not need to banish them entirely–although this line of argument really deserves an article of its own.

[Angelides] doesn’t have a heck of a lot of resources. And he has got a good current example of that. The report that was released on what caused Lehman to fail cost $38 million to produce. Angelides’s total budget: $8 million. He’s got to figure out not just what caused Lehman to fail but the entire financial system.

I could have just told you what caused Lehman to fail for free–but you can also give me $38 million if you want; I won’t mind! Lehman failed because they took on 30-times leverage on assets that disguised their risk, but were not truly low-risk assets. Maybe I should get in on some of these Congressional studies; I’d only charge $37.9 million to undercut the market, and I’d come up with basically the same conclusion in half the time.

And while I agree, despite what Fuld and some other ex-Lehmanites are saying , that you can say what was being done at Lehman was probably either accounting or disclosure fraud, it is hard to say it was a cause of the financial crisis.

Lehman is now reportedly under criminal investigation for fraud that Stephen mentions–but that said, I don’t think any serious economist blamed Lehman for creating the crisis (although it was on the tip of the iceberg). This shouldn’t be presented like a bold new revelation.

Of course, it is certainly true that there is more than one factor that lead to the financial crisis.

Sorry, this is news?

Look, let me help save the Angelides commission a lot of time and taxpayer money. Forward them my post “What real financial reform looks like“, and you are free to pay me $38 million for this study, but you don’t have to.

The short story on what caused the crisis:

  • The Federal Reserve pumped in excessive monetary supply after the tech bubble
  • Mortgage brokers over-relaxed lending standards and gave mortgages to people who should never have qualified
  • Credit ratings agencies, who are supposed to be the alarm bells to excessive risk, were rubber-stamping debt that was truly toxic as AAA

We need some more intelligent discourse on these issues. Articles like this TIME blog post water down the issues, likely so that an ordinary person without an economic background can understand them, and hence keep their readership (and advertising revenue) high.

That’s a problem though and not a virtue. These issues are indeed complex, but we need people to get educated on them. How less likely would the financial crisis have been if more Americans were financially literate and realized that they probably should wait on getting that mortgage?

Real, non-watered down financial journalism and education is what we need, and unfortunately the mainstream press is not delivering.

-Alex Cook

Disclosure: None