Friday, January 28, 2011
Legislate Then Investigate The commission investigating the causes of the "worst economic crisis since the Great Depression" has issued its report and - big surprise - the group split along partisan lines. Democrats issued a majority report, while Republicans offered their own take on who and what was to blame for the Great Recession; the recession that is technically over, but still seems to hang around like a relative who just doesn't know when to leave once the Thanksgiving dinner is over. One of the better bits of analysis of the huge report is from former Bush speechwriter David Frum. Frum writes: "The report...argues that everything that people needed to know was there to be known. The crisis was not a 'hurricane': It was more like a housefire in a home where people routinely smoked in bed." And there's this: "Americans withdrew $2.0 trillion in home equity between 2000 and 2007. At a time of stagnating incomes for most Americans, the housing boom financed the appearance of economic progress – one reason government was so reluctant to act. Minus the housing bubble, I doubt very much that President Bush would have been re-elected in 2004." If you really want to get into this analysis, here are some terrific charts that help to break up the hard facts into somewhat understandable chunks. One of the striking conclusions you reach in reviewing this new report and in reading the mountain of writing that has been produced in books and articles is that many of the so called Titans of Wall Street had, at best, a weak grasp on the facts of the situation facing the economy, not to mention detailed knowledge of what was happening in their own institutions. One juicy headline from the Commission's work is the admission by Federal Reserve Chairman Ben Bernanke, an academic scholar of the Great Depression by the way, that 12 of the 13 major Wall Street financial firms were at the very brink of failure late in 2008. Unfortunately the work of the Commission, tainted by the lack of political consensus, is likely to take us no where in particular. The hopes that a rational, coherent explanation of what cause the economic collapse would lead to a careful reassessment of whether more regulation is needed, whether the biggest of the big banks are too big, etc. just hasn't happened. In fact, unlike the justly celebrated Pecora Commission in the early 1930's that lead to the creation of the Securities and Exchange Commission and the passage of banking regulation that, seems to me, served us pretty well for the rest of the century, Congress legislated before the Commission reported. Hope they got it right. Here is some sobering news for the week just ending, the week that saw the Dow top 12,000 and in which it was reported that a Wall Street hedge fund manager personally made $5 billion in profits last year, "Our financial system is really not very different today in 2011 than it was in the run up to this crisis." That quote comes from one of the commission members, Byron Georgiou, who spent the last year trying to understand why we came so close to complete economic disaster; a disaster that has done so much short- and long-term damage to so many people. Here's hoping we aren't setting ourselves up for an even more devastating Round Two.