Papers and Studies Picture

On May 20, 2009, Public Law No. 111-21, the Fraud Enforcement and Recovery Act of 2009, was enacted into law, creating the Financial Crisis Inquiry Commission (FCIC). According to the Act, the FCIC was established to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." The law requires that today, December 15, 2010, the FCIC submit "to the President and to the Congress a report containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States."

This primer contains preliminary findings and conclusions released by Vice Chairman Bill Thomas, Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin, and Commissioner Peter J. Wallison, and represents a portion of the findings and conclusions resulting from our work on the FCIC. As the transmission of the report of the FCIC to the President and Congress requires a majority vote of the Commission, these findings and conclusions do not constitute the Commission's report. Rather, this document is an effort to reflect the clear intention of our enabling legislation.

Our views have been shaped, in part, by our knowledge of economics and financial markets generally. In the course of our examination, we have studied and drawn from the extensive work already available on the financial crisis. This crisis that we were tasked to study is neither the first nor likely the last of its type, and thus our examination of similar, previous episodes also informed our findings and conclusions. To that end, we see this document as a part of an already rich discussion of the causes of financial crises, both in the United States and around the world.

This document adds to that conversation rather than closing it. The two seminal works on the causes of the Great Depression, Milton Friedman and Anna Schwartz's A Monetary History of the United States, 1867-1960 and Ben Bernanke's "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," were published in 1963 and 1983, respectively, many decades after the crisis had ended. We anticipate that future generations will continue to provide additional insights into the causes of this financial crisis as well.

Further, we want to stress the extent to which our views have been influenced by the research and investigations conducted by the FCIC since our first meeting in September 2009. The work included conversations with economic historians, finance experts, and other academics, and hundreds of interviews with market participants, regulators, and government officials. While we may have organized and conducted some of these investigations differently given the choice, we have found many elements to be useful. We thank the FCIC staff for their hard work.

We have tried to distill those issues that we think are most important into a series of questions and answers. Different questions were included for different reasons, including those topics that, in our view, are commonly mischaracterized and those most relevant to future policy discussions. Certainly, this is not an exhaustive list.

Our framework reflects a central premise that the financial crisis was distinct from other recent important economic events, including the housing bubble and the prolonged economic recession. We believe that the financial crisis was, at its core, a financial panic that was precipitated by highly correlated mortgage-related losses concentrated at large financial firms in the United States and Europe. While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

We look forward to continuing to participate in the ongoing dialogue on the causes of the financial crisis and providing our additional views as they develop.