January 27, 2011 - The financial crisis was avoidable, according to the final report of the Financial Crisis Inquiry Commission (FCIC). In the report, released Thursday, the commission concludes that excessive borrowing, risky investments, and lack of transparency put the financial system "on a collision course with crisis." They also conclude that "widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets."
Among the regulatory failures listed by the commission is the 1999 repeal of the Glass-Steagall act, which separated deposit banks from investment banks. NECSI researchers identified the repeal of Glass-Steagall as a critical contributor to increasing financial interdependence in the period leading up to the financial crisis. In a study published on the arXiv and discussed in Wired magazine, NECSI researchers described their analysis of a network of corporations, demonstrating clearly that in the lead-up to the crisis, links formed between sectors of the economy that were previously distinct.
Interdependence--the increasingly strong web of connections among firms---was at the root of the catastrophic spreading of the crisis from sector to sector and around the world. Remarkably, while it is common knowledge that interdependence plays a critical role in enabling local failures in the financial system to induce a global collapse, it is not a common part of our economic policy or planning.
Announcing the release of the report, Chairman of the FCIC Phil Angelides said, "The captains of finance and the public stewards of our financial system ignored warnings and importantly failed to question and understand and to manage the evolving risks in a financial system that is so essential to the well being of our country. Theirs was a big miss, not a stumble."
Angelides' remarks draw attention to the fact that in an era marked by growing complexity, it is critical for policymakers and legislators to pay heed to research that can provide sound advice based on analysis of economic and financial data. NECSI researchers continue to pave the way in conducting rigorous quantitative study of systems like the global economy.