Expectations are high that financial reform will be the next big issue that Congress will tackle, particularly now that Senate Majority Leader Harry Reid is talking down the prospects for getting to immigration reform anytime soon.
And in typical congressional fashion, the reform bill will probably pass and become law before the bipartisan commission empaneled to determine the causes of the financial crisis is finished with its work.
Whether this is a problem depends on how you look at it.
On the one hand, there seems to be little immediacy for passing a financial reform bill, and therefore good reasons for waiting until we better understand the causes of the crash and panic. The system has by all accounts been stabilized, albeit at great cost. The key to avoiding future panics and costs — and thus to producing any good legislation — is to understand what went wrong and why. “Greedy bankers” doesn’t cut it; greed and bankers, and greed among bankers, existed long before the 21st century.
The likes of Barney Frank, Chris Dodd, Richard Shelby and Spencer Bachus were deeply involved in congressional oversight of banks and the financial sector in the years leading up to the crisis. To think they suddenly have all the answers, and don’t need to wait for the commission to finish its inquiry, strikes me as crazy.
They and the rest of Congress may have a sense of political immediacy on the issue. Voter anger about the crisis and the bailouts was high in 2008, and it will be high again in this year’s elections unless lawmakers “do something.” But that’s no good reason to rush things. Congressional history offers too many examples of the bad unintended consequences from rush jobs (see: Sarbanes-Oxley).
The commission is not off to the best of starts. In his column today, The Wall Street Journal’s Holman Jenkins describes the panel’s third set of hearings, held last week, as an “incurious inquiry” that failed to ask such key questions as:
What exactly was it about these securities that caused a global panic — that caused, in the words of Goldman Sachs, a situation in which “institutions were hoarding cash and were unwilling to transact with each other”?
Was it fear that banks wouldn’t be able to sell these now-illiquid securities to meet their own obligations?
Was it fear that government would force banks to recognize accounting losses on them so great that the banks would be rendered insolvent?
The question is crucial because panic was the key actor in the drama — turning a severe housing correction in a handful of U.S. states into a global calamity.
The most interesting panel of witnesses consisted of several Citi executives who ran this business. A question the inquisitors failed to ask is how these supposedly super-safe securities are performing today. Have they been able to withstand the surge in mortgage defaults? Do they continue to pay? The question begged to be asked, but [commission Vice Chairman Bill] Thomas was too busy assuring the Citi executives that the commission’s final report “won’t contain one word of what you folks just told us” and then promptly berating them over whether they lost “one night of sleep over what happened.”
One of the few things we did learn from the panel, Jenkins writes, was the admission from Thomas, a former GOP congressman, that “the inquirers are getting insufficient time to master their brief — easy to believe given their reliance on the adjective ‘toxic’ to substitute for any curiosity about the securities at the heart of the meltdown.”
As Jenkins’ colleague, Peggy Noonan, wrote of the hearings, “Can’t we do better than this?”