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Five Things: The Myth of The Crisis

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One year later, the myths persist...

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"We will not go back to the days of reckless behavior and unchecked excess."
- President Barack Obama, speaking on "Financial Rescue and Reform" at Federal Hall in New York City, Sep. 14, 2009

"That's it; my days of reckless behavior and unchecked excess are over."
- Kevin Depew, speaking early in the morning to no one in particular on hundreds of separate occasions.

Not many Americans know this, but Wall Street is actually just a dead-end corridor of 1,500 feet carved like a small notch into the side of lower Manhattan. One end is capped by the East River, the other by Trinity Church. The dark, narrow length between is crowded by tall, stone buildings that send down shadows of such fierce certitude that you're sure no ray of sunlight has ever once dared to intrude; like some kind of fiscal Stonehenge.

It's possible to escape these shadows by no fewer than half a dozen side streets and alley openings, but there's no shaking the creeping uneasiness that something you can't quite comprehend is taking place all around you.

Of course, what passes for escape is nothing more than silent complicity. True deliverance from Wall Street comes only two ways -- the river or the church.

It's just past noon on a crystalline Monday in New York City, and even as he's standing inside Federal Hall on Wall Street and Nassau, nearer the church than the river, it's not quite clear President Barack Obama grasps this crucial point. The occasion is to mark the one-year anniversary of The Crisis, an ill-defined, loose-fitting moment that no one, not even the president, seems to be able to pin down.

The Wall Street Journal this morning neatly packaged everything into one box: The Crisis, a Year Later. Similarly, the New York Times is running with Financial Crisis: One Year Later. The Washington Post is Taking Stock.

And yet, paging through all these stories -- digital pile after digital pile of them -- it's still unclear what The Crisis means. No one even knows what tense to use when writing about it because no one is really sure if it's over, let alone when it started. As a result, we've resorted to creating a number of extraordinary myths to help explain to ourselves what has happened.

Five Myths of The Crisis

One: The Anniversary.

Before we get to The Anniversary itself, let's figure out what is The Crisis? Is it Lehman's collapse? Is it toxic mortgages? Is it housing? Is it lending? Is it credit? Is it debt? Is it regulation? Is it consumption? Is it financial engineering? The answer is, yes. It's all of those things.

And so this anniversary is really no anniversary at all; we're commemorating the wrong thing. In fact, the anniversary of The Crisis is one of the myths we've created to help explain to ourselves what it is that's happened -- ironically, while we go about doing more of the very things that caused it to happen in the first place.

This is not to say that the collapse of Lehman Brother wasn't a significant event. It was. But it was a culminating crash of a wave that had been building for years, which brings us to one of the more widely perpetuated myths from no less of a source than the chairman of the Federal Reserve.

Two: It all began with subprime lending.

In a speech delivered before the London School of Economics last January, Federal Reserve Chairman Ben Bernanke outlined a subtly more in-depth and critical view of the origins of The Crisis than anything he had publicly stated previously.

According to Bernanke, although the subprime debacle triggered the crisis, the developments in the US mortgage market "were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit." Indeed.

This view further explicates and builds on the one he first stated before the Economic Club of New York in October 2007. At that time, Bernanke, like many public finance officials, had just spent months and months prior to October 2007 describing the financial crisis as "well contained" to subprime lending; an isolated outlier of what, at that time, were routinely accepted as perfectly normal credit market conditions. Of course, by January of this year, Bernanke recognized it was far deeper than that.

In January, Bernanke admitted that the negative aspects of this "more encompassing credit boom" involved "widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking."

Naturally, Bernanke didn't take the next step and acknowledge that the Fed itself was a co-conspirator in the credit orgy, but at least he did back away from the earlier assertion that everything somehow hinged on subprime lending.

The reality is that subprime lending was the inevitable consequence of The Crisis, not the cause of it.
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