The Occupy Wall Street political movement blamed Wall Street bankers for the financial crisis of 2008, but the bankers were just crony capitalist pawns in a in a system crafted by politicians on Pennsylvania Avenue. That's why Washington DC gained more one-percenters during the last decade than any other American city. The crime was attempting to expand home ownership beyond what households could afford by enticing and forcing financial institutions to take extreme risks, with tax payers picking up the tab. The political cover-up in the aftermath is even worse than the original crime. The Federal Reserve fueled an asset bubble, housing policy steered it to housing, and the extreme leverage required to fund political housing goals magnified losses instead of profits. The financial sector bailout, housing market and homeowner bailout, and fiscal and monetary stimulus were all more of the same. A financial sector meltdown was avoided, but at the expense of greater systemic risk prospectively. The Great Recession ended, but the recovery remains weak with economic costs in the aftermath many multiples those during the lending bubble and prospective economic risks are worse still. The only relevant economic precept is the original - incentives matter. Understanding the financial crisis requires no more than an explanation of how politicians perverted them. The simple prescription to avoid future systemic financial crises is to limit discretionary monetary policy, separate subsidy from finance, impose appropriate capital requirements, improve political oversight and re-introduce market discipline, the opposite of the Dodd-Frank reform legislation.
About the Author: Kevin E Villani is currently an executive scholar at the Burnham-Moores Center for Real Estate at the University of San Diego, a principal of University Financial Associates LLC and an international financial and economic consultant. Most recently, he was an Executive in Residence at San Diego State University and an adjunct finance professor in real estate development. Dr. Villani recently served on the Board of Provident Investment Council (PIC) as an independent trustee. He previously served as the Vice-Chairman of Imperial Credit Commercial Mortgage Investment Corporation (ICCMIC on the NYSE). From September 1995 through December 1999 he was EVP/CFO of Imperial Credit Industries Inc. (ICII on the NASDAQ) and President/CEO of Imperial Credit Asset Management (ICAM), and served as a Board member of ICII and its subsidiaries. From 1985 through 1990 he served in similar capacities at Imperial Corporation of America (ICA). Villani began his public policy career with the Federal Reserve System in 1974 as a monetary and financial institution economist. He subsequently spent fifteen years in Washington, D.C. as a senior government official in the Ford, Carter and Reagan Administrations and advisor to the World Bank, IFC, U. S. AID and various think tanks in the areas of housing finance, real estate, finance and capital markets, privatization and macro-economics. In the early eighties, he served in various capacities at Freddie Mac, including Chief Economist and acting Chief Financial Officer. Prior to that, he was Deputy Assistant Secretary and Chief Economist for HUD in Washington D.C. From 1990-97, Dr. Villani was the Wells Fargo Visiting Professor of Real Estate and Finance at the University of Southern California. He has also served as an adjunct professor at the University of Pennsylvania, Northwestern University, George Washington University, Purdue University, George Mason University and Cleveland State University. Dr. Villani has been instrumental in the development and introduction of many of the innovative financial instruments currently in use in domestic and international capital markets. He has written or co-authored over 100 books and articles and has edited several academic journals. Dr. Villani has a B.S. degree in mathematics from the University of Massachusetts at Amherst and M.S. and Ph.D. degrees in economics and finance from Purdue University. He is a former associate in the Society of Actuaries.