Causality and The Financial Crisis Inquiry Commission

The Financial Crisis Inquiry Commission released its official report today (here). The Commission was created to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." How effectively the Commission executed its charge and what the causes of the financial crisis were will be debated for many years to come (the causes of the Great Depression are still being debated after 82 years).

My interest is in developing a causal model of the financial crisis. In future posts, I will try to read the Commission's report and see what kinds of causal theories (if any) are embedded in the verbiage.

I have read one interesting causal explanation of the financial crisis by Alan Schwartz, the last CEO and chairman of Bear Stearns. An account of Bear Stearns' role in the financial crisis can be found in the excellent book "House of Cards" by William D. Cohan (you can read an excerpt of Schwartz's description from the book here).

I've worked out Schwartz's causal model at right (click to enlarge). Without getting into details, Schwartz traces the rise of Wholesale Banking and collateral financing to the repeal of the Glass-Stegall Act in 1999 and the increase in excess wealth seeking high returns as a result of globalization.

Now, let's see how the Financial Crisis Inquiry Commission does with their causal analysis.