In the future, get information in time to prevent a crisis
COMMENTARY | October 277, 2008
This is a job for serious experts. We’ve got them in academia. Let’s put them to work in Washington in an organized, watchdog fashion.
By Martin Lobel and Joseph I. Goldstein
Lobel@LNLlaw.com
jgoldstein@mayerbrown.com
Along the way to enactment, a three-page, $700-billion bailout bill, accompanied by a daily Dow roller coaster ride, morphed into a massive piece of legislation – 451 pages at our last count – that carries with it a great deal of confusion.
While everyone is uncertain about what is coming next, we ought to think about what we can do to prevent a repeat crisis next year or the year after. First off, as there was in 1933, there should be another Pecora type investigation into how we got to this state of affairs. And at the same time, we should create an office to identify, analyze and publicize financial market problems before they become crises in the future.
Based on our past experience in government, we think the office we’d set up should be staffed by serious academics on one- or two-year fellowships during which they would be expected to rigorously analyze potential problem areas. They would present their findings to Congress, the Administration and the agencies so that they will no longer be able to say, “We didn't know".
Bringing in academics for a year or two would ensure very high quality analyses untainted by a desire to protect a government agency's turf as was done in the 1930s with the TNEC (Temporary National Economic Commission) which resulted in some very effective reforms.
The office's reports could be used by the media to judge whether Administrative departments or agencies were properly executing their responsibilities, to question whether Congress and the Administration were doing enough to avoid such foreseeable problems, and hopefully spare us another massive bailout.
Ordinary citizens and the media are asking how did we get into such an economic crisis that a rock-ribbed fiscal conservative like Secretary of the Treasury Paulson had to get down on one knee to beg that his proposed $700 billion bailout of Wall Street not be blown up. They want to know why the government didn’t intervene to prevent the financial “wizards” from becoming so over leveraged that they put our entire credit market at risk.
There are many reasons why the government didn’t prevent the risky behavior that led to this economic crisis. In part it was that the Administration was so sold on its belief in the ability of the “free market” to correct mistakes that it didn’t feel the need to put policemen on the beat. In part it was that key financial institutions made so much money devising and trading derivatives and other financial instruments that were very difficult to value accurately. In part it was our desire to put as many people as possible into their own homes, even if they really couldn’t afford to pay for them. And in part it was fraud, and in part it was that both political parties were feeding from Wall Street’s trough and didn’t want to risk cutting off campaign contributions.
And in part—an important part—it was the media’s failure to alert the public.
The structure of our financial regulatory agencies was devised in the 1930s to deal with the problems raised by the financial system of that day. Even if our regulatory agencies had a desire to police the system of today, they couldn’t because of the gaps in regulation which are exploited by those who are interested in making short term profits at the expense of our longer term economic interests.
Everyone now understands that we have to revamp the financial regulatory system to deal effectively with domestic and foreign economic issues. Indeed, Congress in this bailout bill established a panel of five “wise men” to report back in January on how we should revamp it. It is unlikely, however, that these wise men (wise people?) can reach specific conclusions in such a brief time. We need something for the long term: an office that could function like the Lictors in Rome whose duty it was to warn the rulers at least once a day that they were mortal and needed to think before acting.
Lots of the causes of the current crisis had been identified before all hell broke loose. For example, Long Term Capital's wrong bet on derivatives showed the fallibility of computer model valuations; Warren Buffett voiced his fears about the toxicity of credit default swaps; "no doc" mortgages were a cause of the S&L crisis of the late 1980s yet they reappeared in time to help create the current housing meltdown; the GAO reported that the SEC knew of Bear Stearns excessive leverage, but, according to the SEC Chairman, was not able to act because of a lack of specific legal authority.
There are talented people studying parts of the problem in the GAO, Joint Economic Committee, Joint Committee of Taxation, Treasury, OMB, SEC and the Federal Reserve Board. Despite that, neither the Administration nor Congress effectively addressed the problems. Perhaps expert, idealistic academics could.
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Martin Lobel is a partner in Lobel, Novins & Lamont, a Washington, DC, law firm, and chairman of the board of Tax Analysts (www.tax.org), a source for journalists.
E-mail: Lobel@LNLlaw.com
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