The official account of the financial crisis won’t dispel anyone’s impression that the Fed has spent the past decade in a fog.

The Financial Crisis Inquiry Commission’s 662-page report will give the central bank’s many critics much to chew on beyond the current hubbub over loose monetary policy. The report, released Thursday morning, names former Federal Reserve chief Alan Greenspan and current Chairman Ben Bernanke as two of the main enablers of the credit bubble that led to the 2008 collapse.



No magic from the maestro

Greenspan, well known for his deregulatory zeal, simply refused to enforce regulations that could have prevented some of the worst subprime lending abuses during the bubble, the panel said. Bernanke was not exactly a vigilant watchdog either and failed to take seriously the threats a collapsing bubble would pose to the health of the economy.

One telling incident from the Greenspan era of unbenign neglect comes from a Cleveland area official who warned a Fed governor in 2001 of the wave of easy money-fueled house-flipping scarring the area.

“I naively believed they’d go back and tell Mr. Greenspan and presto, we’d have some new rules,” Cuyahoga County treasurer James Rokakis told the FCIC. “I thought it would result in action being taken. It was kind of quaint.”

Quaint would be one way to describe the attitude Bernanke held toward the economy in the days before the crisis. The report dutifully recounts some of his blunders of the bubble era, ranging from his complacent 2004 pondering about the roots “great moderation” in economic growth to his 2007 claim the subprime meltdown would be contained.

To be fair, Bernanke does come off a bit better than Greenspan, not that that’s saying much.

Unlike the excuse-making Greenspan, Bernanke owns up to the damage done by the Fed’s failure to enforce its mortgage lending guidelines, calling it the central bank’s “most severe failure” during the crisis. Under his leadership the Fed did belatedly toughen its guidelines. And of course he mostly acquitted himself well in the impossible task of battling the acute stage of the financial crisis.

Even so, the agency remained depressingly out of touch, judging by its apparent puzzlement over longtime realities such as regulatory arbitrage – the practice in which bankers choose the regulator that is least apt to demand they act prudently.

Confronted with the fact that even responsible firms such as JPMorgan Chase JPM , let alone the likes of AIG aig , had spent years contorting themselves to get in good with other regulators, how did the Fed respond? Why, by commissioning a study.

In January 2008, Fed staff had prepared an internal study to find out why none of the investment banks had chosen the Fed as its consolidated supervisor. The staff interviewed five firms that already were supervised by the Fed and four that had chosen the SEC. According to the report, the biggest reason firms opted not to be supervised by the Fed was the “comprehensiveness” of the Fed’s supervisory approach, “particularly when compared to alternatives such as Office of Thrift Supervision (OTS) or Securities & Exchange Commission (SEC) holding company supervision.”

Comprehensiveness, no. That is not what bankers are looking for in a comprehensive supervisory entity. It is refreshing that they admitted they preferred not being supervised.

It is not clear why this warranted a study, but the whole game changed anyway in September 2008, when it turned out that the alternative to accepting Fed regulation was to go out of business, as Goldman Sachs gs and Morgan Stanley ms nearly did.

The firms “had consistently opposed Federal Reserve supervision,” New York Fed general counsel Tom Baxter told the FCIC. But after Lehman Brothers collapsed, “those franchises saw that they were next unless they did something drastic. That drastic thing was to become bank holding companies.”

By then, of course, no survey was necessary to determine their motives.