Wednesday, January 14, 2009
I'm just sitting down to live-blog, intermittently, the hearing of the TARP Congressional Oversight Panel, or COP. This hearing is about regulatory reform, BTW, not the panel's ongoing inquiry into what on earth Hank Paulson has been up to.
This isn't my first try at live-blogging a hearing, but the soporific effect of droning Congressmen has foiled my past attempts. However, this isn't a Congressional hearing, so perhaps I can stay awake.
Chair Elizabeth Warren gave her introduction, and now the panel members are each giving statements.
9:08 am - Damn, I forgot there's a Congressman on the COP - Republican Jeb Hensarling; he's speaking now. Must try not to fall asleep. I think he's warning against an overreaction that might lead to overregulation. Thanks, Jeb, but I'm going to worry about that one later.
Damon Silvers of AFL-CIO followed, but my toast was popping up so I missed him.
9:19 am - Former Senator John Sununu just made a good point - that it's not just what regulations you have, but how those regulations operate in practice. I feel like people don't say this often enough.
9:24 am - Richard Neiman, NY State Banking Supervisor: Not much of interest. Sorry, Mr. Neiman.
Now cometh the witnesses: (here's the witness list).
9:29 am - Gene Dodaro, acting head of the GAO: Regulatory system is outdated, has gaps, etc. New products, like credit default swaps, aren't sufficiently regulated. But we must avoid "unanticipated consequences" of any changes we make. (Well, Gene, how does one take steps ahead of time to avoid unanticipated consequences? Do you see any flaw in that concept?) He notes that no one regulator is charged with looking at risks across the whole system. Yes indeedy, that's been a problem.
9:46 am - Hensarling says prosecutors are focused on terrorism and don't investigate and prosecute fraud these days unless it's earth-shaking. An interesting point - is he right, and is this an underestimated factor in the meltdown?
9:48 am - Dodaro has what I'd swear is a classic New York accent - and a face to match it - even though Wikipedia says he grew up in Pennsylvania. He really ought to be starring on Law and Order. Oops, my attention is wandering. Detailed Q&As going on about pros and cons of different federal regulatory structures, involvement of states, etc. State regulators, says Dodaro, give you "eyes and ears on the ground" so we should keep them in place.
10:05 - Second panel is seated. Warren just made a comment about having trouble with people's names and this being like a "confusing dinner party." No wonder I'm so hungry.
10:07 - Sarah Bloom, Commissioner of the Maryland Office of Financial Regulation. Her not-so-thinly-veiled message seems to be that the state regulators have been doing their jobs, but the feds have not. From her state "foxhole," she says, she's watched "classic regulatory capture" take over in Washington. Go, Sarah. Oooh, she even managed to mention Katrina and FEMA. She claims the states were on top of subprime lending and saw the flaws of the Basel capital accord (you know, that brilliant decision to let the banks calculate their own risk and decide how much capital they needed).
10:13 - Joel Seligman, President of the University of Rochester and serious securities law guru in his past life: Lays out his broad principles for a new system, including: (1) let's make a clear distinction between emergency moves and long-term restructuring, and (2) financial regulation should be comprehensive, including all products, folding in insurance companies (AIG, anyone?), credit rating firms, investment advisers. We have a "partial" regulatory system at the moment. In his new dream system, the Fed would be at the top. He also mentions "private rights of action" as being part of the regulatory structure. This means lawsuits, by those dreaded trial lawyers. Wow, I didn't expect that one, but I kind of like it.
10:19 - Robert Schiller, Yale economist: Brags that he's written 2 books about this subject, and seems to be implying "why haven't you guys read these already?" He wants to "democratize finance." Government should subsidize personal financial advice and financial education. He agrees with Elizabeth Warren's idea of a "Financial Products Safety Commission." We need to improve risk management. He wants to create "continuous workout mortgages;" i.e., in recessions the mortgage payment and principal would automatically adjust down. Good luck with that one, Bob. Have a nice drive on Utopia Parkway.
10:22 - Joseph Stiglitz, Columbia economics professor and Nobel laureate: This bailout, and past bailouts, reflect the failure of our system to meet basic requirements, like evaluating creditworthiness. In fact, America's financial system is pretty much a failure overall -- lack of transparency, flawed incentive structures that foster risky, short-term behavior. Good regulation can attract capital and encourage creativity. Derivatives should be approved by that wonderful Financial Products Safety Commission that could exist in the future. TARP has failed because there's been no regulatory reform accompanying it. We could have used $700 billion to create a new institution - huh? sounds intriguing but he's not explaining it. I kind of expected more from Nobel Prize Guy.
10:30 - Marc Summerlin, Managing Director at the Lindsey Group (who is this person? I must look him up): Fed should take a more active role in preventing bubbles and mitigating boom/bust cycles, and in fact the Federal Reserve Act says so. (I'd like to hear more about that part.) Fed has created "a bias toward overvalued assets." Buying a house with no down payment "is not home ownership; it is renting with risk." Nice point. Also, binding leverage ratios work and we should have more of them, he says.
10:37 - Peter Wallison from the American Enterprise Institute: Regulation itself introduces moral hazard, because people think the government is on top of things. There is no policy reason why the government should take responsibility for preventing business failures - let 'em fail. Regulation hasn't been working, so why have more of it? (Gee, you'd think this guy was from the American Enterprise Institute or something.) It is "a very bad idea" to empower an agency to identify "too big to fail" institutions because you end up with numerous Fannies and Freddies that have a competitive advantage over purely private firms. So what does he want to do? Require more transparency about the risks that firms are taking, and pay more attention to short selling and hedge funds.
Question period starts: Elizabeth Warren goes directly to Wallison's argument that regulation hasn't worked. She refers to the "regulatory capture" that state regulator Sarah Raskin described and asks him: isn't it really "non-regulation regulation" that has failed here?
Wallison (who still believes in oxymornons like market discipline) answers that creditors, not regulators, are the ones that can effectively "regulate," as long as there's transparency. Warren invites Raskin to respond. She says she believes regulation has worked, again praising state regulators. I hope she's right, though I'd feel better if she weren't a state regulator who fears being legislated out of existence.
Seligman comments that "effective regulation can increase confidence." But "non-regulation regulation" can undermine that confidence. (Will the oxymoron "non-regulation regulation" spread and become the new catch phrase for policy geeks?)
Hensarling, being a good Republican, apparently woke up when Wallison mentioned Fannie and Freddie; he asks for comments on the role of the GSEs. Summerlin says Fannie/Freddie had an incentive problem - they could "privatize profits and socialize losses." So the government backing made things worse, right? asks Hensarling. Yeah, I guess, says Summerlin.
Silvers from the AFL-CIO, who's been strangely quiet, asks Seligman about regulatory consolidation. Seligman talks about balancing the useful expertise of separate regulators (e.g., for securities and commodities) against the danger of regulatory arbitrage.
Silvers asks Raskin how Fannie/Freddie mortgages have performed versus purely private sector mortgages. She doesn't really answer the question.
Silvers asks Stiglitz what he thinks of the Fed as a regulator. Stiglitz says the Fed was " too easily captured in the spirit of the bubble." It must become more explicit about its mandate, and that must be to create financial stability, not just to monitor inflation. And it should be more "representative." In Sweden, he notes, labor has representation at the central bank. I'm proud of the American Enterprise guy for not immediately jumping up and calling Stiglitz a socialist just for mentioning Sweden.
Gotta go now - you're on your own.