Never Again?

The New York Times J.P. Morgan, left, with his counsel at the Pecora commission hearings in 1933.
The final judgment of the official inquiry into the 2008 financial crisis — that it was an avoidable disaster, brought about by regulatory neglect and Wall Street recklessness — was an admonition to the government never to let it happen again.

Most experts aren’t holding their breath.

Bubbles and manias, followed by crashes and hangovers, seem endemic to capitalism. The Wall Street overhaul enacted last year hopes to blunt the impact of such boom-and-bust cycles — by reining in the use of exotic financial instruments, better supervising big banks and limiting the damage if one of them fails.

But the first two efforts are under attack by the new Republican majority in the House, and the new process for containing the fallout from a giant bank’s collapse is untested. Meanwhile, the financial sector’s outsized role in the economy hasn’t changed; the giant banks that were considered “too big to fail” have only gotten bigger.

It was not the same the last time around.

The Senate conducted hearings from 1932 to 1934, in the Depression’s depths, to investigate the causes of the Great Crash. Led by a fiery prosecutor from New York, Ferdinand Pecora, the proceedings galvanized outrage over Wall Street excesses and created the climate for sweeping changes to securities and banking laws, according to Michael Perino, who teaches law at St. John’s University.

“The real lesson of the Pecora hearings is that fundamental reforms to the structure of financial regulation invariably come in the wake of crisis and scandal,” says Mr. Perino, whose biography of Pecora, “The Hellhound of Wall Street,” was published last year by Penguin. “That ship has sailed, and we missed it.”

In unveiling its 633-page report Thursday — accompanied by a slightly shorter commercial version, on sale for $14.99 — the Financial Crisis Inquiry Commission noted the outsized influence of banking lobbyists and Wall Street campaign contributions. But it did not suggest limiting the size and concentration of banks, as some economists have urged.

In their defense, commission members said they were tasked with assessing the crisis’s origins, not advocating reforms.

“For us to have been asked to determine what happened and also to propose solutions – that I think would have taken a lot more time, a lot more energy,” said one commissioner, John W. Thompson, a technology executive.

Moreover, the commission’s verdict – bankers and regulators: guilty as charged — reflected just a bare majority of its members, the six named by Democrats. The four Republicans dissented.

“The commissioners’ failure to agree on most of the causes and narrow their differences to a handful of issues does the country a great disservice, by perpetuating the idea that reasonable people cannot understand what happened,” said Anil K. Kashyap, a business school professor at the University of Chicago, who added that most economists are in basic agreement on the factors that caused the crisis.

The report also came too late to shape the Dodd-Frank law, the Wall Street reform act that President Obama signed last year.

“They were told to explain what caused the crisis – and the implications for reform — but by the time the report came out, we were six months into the reform,” said David A. Skeel Jr., who teaches corporate law at the University of Pennsylvania.

The Dodd-Frank law strengthened and added regulatory authority, but punted – Mr. Skeel says “outsourced” – many of the most intricate decisions to agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission. Mr. Skeel worries the rules, which could be years in the making, will be watered down.

Its warnings about the perils of deregulation might be the report’s most lasting contribution, said Greta R. Krippner, a University of Michigan sociologist whose book “Capitalizing on Crisis: The Political Origins of the Rise of Finance” (Harvard University Press) comes out next month.

“The report reinforces the view that financial activities should serve the nonfinancial economy, rather than the other way around, as has been the case in the U.S. economy over the last several decades,” she said.

That orientation toward finance — rather than the deregulation and avarice — is the real source of instability, according to Judith Stein, a historian at the City University of New York Graduate Center and the author of “Pivotal Decade: How the United States Traded Factories for Finance in the ’70s,” published last year by Yale University Press.

“Low wages, low interest rates to encourage consumption, and too much investment in housing and financial services because of the decline in manufacturing and other tradable goods – those are the underlying causes.”

Far-fetched?

The report revealed that no less a capitalist than John W. Snow, a railway executive who was President George W. Bush’s Treasury secretary just before the crisis, questioned Wall Street’s outsized role in American life.

“We overdid finance,” he told investigators, “versus the real economy.”

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