Last week, Planet Money aired an interview by Adam Davidson with Barney Frank, the blunt and colorful chairman of the House Financial Services Committee. Davidson and Frank had a pitched disagreement over the question of whether it made sense to appoint a bipartisan, expert panel to take some time – figures between one and three years were thrown around – to study the causes of the financial crisis and, on that basis, recommend regulatory changes. Davidson thought it was a good idea; Frank thought it was nonsense.
I’m with Frank on this one, and the argument applies to the Financial Crisis Inquiry Commission, also known hopefully as the “New Pecora Commission,” appointed by Congress to study the causes of the crisis.
A parallel is commonly drawn to the 9/11 Commission, which I believe is widely considered to have been both genuinely bipartisan and worthwhile. However, I think the differences are more important here. On September 12, 2001, most people – certainly including most people in government and policy, and almost certainly including even the most highly-placed people in the country – had only the vaguest idea of how nineteen terrorists had infiltrated the country and managed to hijack four plans, using three of them successfully as bombs. The Commission’s mandate was to understand how that happened, and in particular how our intelligence and security agencies had failed to prevent this attack. That is, there was a shortage of information, and most of the information was classified anyway, so a thorough investigation was called for.
By September 16, 2008, most people in the business already knew the causes of the financial crisis: cheap money, new and predatory mortgage products, lax underwriting practices, the transfer of risk through securitization. dependence on ratings by overwhelmed rating agencies, failure of regulatory agencies to regulate, greediness on the part of banks and bankers who ate up their own AAA-rated dog food, unhealthy dependence on short-term funding, etc. There has been argument about the relative importance of these factors, but the basic story is so well known that it has spawned multiple cartoon caricatures. There is little fact-finding necessary to determine the causes of the crisis; we should already be at the phase of analyzing empirical data, and I can predict with confidence that seventy years from now there will be economic historians arguing both sides of this question; after all, that’s what happened with the Great Depression.
I expect, and hope, that the Financial Crisis Inquiry Commission will uncover some especially sordid details of bankers laughing about screwing their customers, or regulators on the take from the banking industry. And if that happened, then those people should be sued or put in jail. But we already know that bankers were screwing their customers, and we know that regulatory agencies were friendly toward the banking industry (whether because of corruption, simple ideological alignment, or orders by political appointees makes little difference in the broad story).
I am skeptical that months or years of study will bring us any closer to consensus on the major questions, because the crisis is so overdetermined; there is plenty of evidence to construct multiple plausible narratives about how it happened, each one of which points to a different regulatory solution (and whether you could get that solution through Congress is yet another question).
Thinking cynically, spending 1-3 years studying the problem could also be cover to let the issue fade away; the impetus for reform is already far weaker today than it was in, say, February when Citigroup was going through its third near-death experience. I know that’s not Davidson’s intent, but I’m sure there are others who would be only too happy to bet that the economy and the popular mood will return to normal. Remember Sarbanes-Oxley? It was weaker than originally imagined, and by 2007 there was a movement afoot to repeal it, since people had already forgotten Enron and Worldcom. Let’s hope that doesn’t happen again.
By James Kwak
The Baseline Scenario 
This crisis is far from over. The junk hasn’t gone anywhere. Reform always eventually makes it through, but it just comes with a lot of pain.
I’m quite sure that by the time the study would be released, finance would have ‘innovated’ around its recommendations. Further, any laws drafted for consideration would be subject to huge amounts of regulatory capture that would feed the new innovation around the recommendations.
Readers of this post might want to check out the website, “What caused the crisis,” which is a unified call for a tough Pecora Commission.
You might also like Elizabeth Warren’s new piece about regulating non-bank lenders at NewDeal2.0.
Innovation is starting to have a negative association.
I hope you are not endorsing Frank generally. A progressive’s worst nightmare is a powerful Democratic congressman who blusters endlessly, claims to understand things concerning which he is ultimately clueless, and delivers pompous history lessons from his highchair on some repulsive committee whenever possible. If anything, the conduct of the Democrats during this disaster has been even more disappointing than that of the Republicans, which was at least predictable. As for a truth commission, it would at least stimulate some middle class employment, perhaps among economics graduates.
I’m all in favor of a commission if it will lead to a coverup like it so often does.
Yes, and the laws should be designed to give a competitive advantage to the largest players at the expense of the smaller ones in order to tilt the playing field.
James – Great blog. Good post as always. But, c’mon, you left wingers constantly shoot yourselves in the foot by not adding something along the lines of “greedy consumers” to the list of causes of the Great Recession. You can’t blame EVERYTHING on business and the government. Millions of consumers were (and still are) over-stretched and millions purchased homes that they could not afford due to ignorance, greed (assumed their houses would continue to increase in value, and yes, aggressive mortgage sellers.
A parallel is commonly drawn to the 9/11 Commission, which I believe is widely considered to have been both genuinely bipartisan and worthwhile.
It was genuinely bipartisan: George Bush appointed the members himself.
Also it was extremely worthwhile because it provided justification for war (always worthwhile), removal of civil liberties (wonderful), torture (loads of fun for the whole family), airport security (effective and entertaining), spying on Americans (who doesn’t love that?), check points and national id (your papers please?). Not to mention the fact that it provided us with “the truth.” Indeed, the 911 commissioners felt there was so much cooperation on the part of the DOD and the CIA, that is had no trouble producing an absolutely brilliant report. http://en.wikipedia.org/wiki/Criticism_of_the_9/11_Commission
One very odd recommendation in the report that seems to have been ignored was recommendation 28: “…We also encourage the insurance and credit-rating industries to look closely at a company’s compliance with the ANSI standard in assessing its insurability and creditworthiness….”
To take that cynical thought further, I doubt either side believes that a bipartisan commission would uncover an astounding economic secret. It would provide the public with heroes (our hardworking congressman) and villains (greedy Wall Streeters and slippery local mortgage brokers). Most of all, it would give the politicians on both sides of the aisle a chance to pander for votes and campaign contributions. Economics is a tad complicated for the politicians, let alone the lay folk. Even without this bipartisan freak show, the desire to reengineer the regulatory apparatus is waning.
We conservatives need to crack down on those greedy little critters. You know, instill a little discipline and sense into them. Maybe then they’ll see the superiority of our conservative ways.
do you honestly think there is a consensus on the causes of the crisis?
there’s absolutely no consensus on the role of fannie + freddie for example.
No one has even proven there was a crisis. Or that organizations deemed “too big to fail” were in fact too big to fail.
“Economics is a tad complicated for the politicians, let alone the lay folk.”
Given recent results, I’d say it’s a tad too
complicated for professional economists too.
I’m halfway with you on this one, James. I agree that we shouldn’t be sitting around for 1-3 years, waiting for a commission to deliver its special report, before we start pushing through changes in the financial system. But I think you gloss over this point: “There has been argument about the relative importance of these factors, but the basic story is so well known that it has spawned multiple cartoon caricatures.” The truth is, there’s a lot of debate over the relative importance of the many factors — the Asian savings glut, Fannie and Freddie, securitization, low interest rates etc. — that right now we’re swimming in competing narratives to understand what mattered the most in what went wrong. A popular conservative narrative, for example, places much of the blame on the CRA, Fannie and Freddie. Now, if you believe that, then we should spend most of our time reforming the CRA and Fannie and Freddie. I think trying to settle questions of which factors were relatively more important matters because we only have limited resources and political capital to make changes, so we should attack the big stuff first. I think there’s a real benefit to having a bipartisan look at what factors were most to blame for this crisis, and trying to fashion a coherent, middle-of-the-road understanding of what went wrong.
i agree with Kwak that we have plenty of evidence, and a plethora of independent rationales about what happened. An economic panel would not come to a single consensus, imo.
James Kwak: Your list of failures is certainly long and leaves no class or entity unblemished save perhaps the people who signed up for and then defaulted on their mortgages. It’s amazing that the US made it through the first 200+ years of life without such a fragile house of cards falling before now. Perhaps we have just experienced the politico/economic version of The Deacon’s Masterpiece (or the Wonderful One Horse Shay).
While we may know the causes of the financial crisis (and I’m not conceding that point) we should certainly take our time working out how to fix them correctly and avoid saddling our system with unnecessary and costly regulation. It’s not likely that the players listed above will repeat the same costly mistakes for a few years anyway — so what’s the rush?
Do we need a series of “tweaks,” an overhaul or a combination? I believe it’s too early to know.
The last thing we need now is regulation. Let’s take a few years to really study things, and then if we still feel like we need regulations, maybe then, with full bi-partisan support we can proceed to enact the least restrictive regulations that we think might barely work. No sense hampering the markets now that the damage has been done and the green shoots are here.
As Adam Davidson and all other serious journolists know, the important thing is to eliminate the unSerious, partisan, far left ideologues from the national discourse.
This naturally means that the voices of Elizabeth Warren, Simon Johnson, any Keynesian and even Barney Frank himself need to be pushed to the side so the middle of the road centrist Friedmanites, Austrian monetarists, and the Respected, Serious Davidson can guide the discussion so these Centrist and underrepresented views can finally get a fair hearing with the American people.
Just like Bush, Davidson must shepherd the discussion around the fringe left media so the truth can get to the people without going through the hard left “media filter”.
Davidson knows that if we eliminate leftist extremism from the discourse (by by Krugman and Reich), an academic consensus about what is good for all of us will emerge.
Davidson is part of the vanguard and must fight the good fight to free the national discourse from the vile hard left poison that permeates everything and brought on the financial crisis in the first place.
Barney Frank is Jooish. Joos are usually highly intelligent, and Barney Frank is highly intelligent. Frank has been studying these things for years now, as have most of his colleagues in the Senate. They are well-versed on these issues (or if not well-versed as well-versed as they’re ever going to be). These “expert commissions” or panels take up tons of time where congressmen sit there asking the same questions or making the same political statements they have made ad nauseam. Or better yet half-asleep or not even in attendance.
These commissions rarely or NEVER change how the House and Senate vote. The Senate and House just votes how the lobbies want them to vote anyway. As they voted with legislation that would have allowed judges to give better mortgage terms to avoid housing foreclosures. Instead they voted with bank CEOs, instead of saving voters from being thrown out of their homes.
And then after that there will be an expert commission made to study the effectiveness of expert commissions. Davidson no doubt has good health coverage provided by NPR, so he doesn’t care if Republicans stall another 3 years.
Ben: “James – Great blog. Good post as always. But, c’mon, you left wingers constantly shoot yourselves in the foot by not adding something along the lines of “greedy consumers” to the list of causes of the Great Recession.”
If greedy consumers were part of the problem, how come we didn’t get a bailout? Shouldn’t we get as much as the bankers? Something like $10,000 a head should do, don’t you think? Let’s stimulate this economy!
now there’s this, proving that we won’t have to wait for a commission for substantive reform:
Click to access capital-statement_090309.pdf
i haven’t gone through it in detail yet.
UnRulley,
Which “far left ideologues” are you referring to??? Wall Street Journal, Forbes, FOX News, Rush Limbaugh, Glen Beck (who called Obama a racist), Mark Levin, The Washington Post (who fired Dan Froomkin for writing about Dick Cheney and torture), PBS’ John McGlaughlin. Bill O’Reilly, Michelle Malkin, New York Times’ David Brooks, Anne Coulter, Sean Hannity, National Review magazine. Shall I go on??? Are those the members of the “far left ideologues” you’re referring to UnRulley?????
By the way, Krugman and Reich both have degrees in Economics, can you tell me what Adam Davidson has his degree in please UnRulley??? You said Adam Davidson is trying to get an “academic consensus”, so I am curious what field Mr. Davidson has his degree in?
Didn’t we already begin the reform for the CRA? Fannie and Freddie have changed 3 times over the course of this whole bubble and burst, I think we are moving back to what they were supposed to be in the beginning, I think. but Fannie and Freddie are by no means the whole of this crisis.
I still have a tendancy to tie this crisis in with the false accting bust of the 90’s-2000’s and the continuing increase of credit rates from the 80’s. I don’t think without the stagnant wages and continued squeezing of family budgets the demand for all of this wouldn’t have existed. Without the push for privatizing of Social Security the need for all the funky market modelling wouldn’t have been sought so strongly. There would not have been such a spike in demand for individual investors, day traders and the like. I think that these are policies that made this bubble and burst much more severe than it ever shoulda coulda woulda been.
“And then after that there will be an expert commission made to study the effectiveness of expert commissions. ”
I love this line.
I sure do wish there were more civil discourse like exist here on this blog though, I certainly think that commissions could be important and effective if constituents were really paying attention to policy makers and policy instead of talking points. I think that if constituents could get beyond the emotional politics they keep feeding themselves we could have real solutions. Meanwhile I love this blog and it’s thoughtful commentor discussions. Vive le Baseline Scenario!
Sorry Ted K,
I was being a smart @ss.
I believe that Adam Davidson is a narrow minded ideologue who is about as insightful as Lou Dobbs or John Stossel.
It is my view that Davidson has an “aristocratic contempt for the swinish multitude”. As a result, he thinks he should act as a gate keeper, quarantining dangerous ideas from the herd, while using poorly constructed analogies to help the poor unwashed get a glimpse at something that is hopelessly beyond their intellectual reach.
That, or perhaps he is more like a 15 year pubescent boy who just got his hands on an Ayn Rand novel out of his step fathers basement and thinks he has just been given the key to the underlying metaphysics of the economic universe.
I hope this clears up my previous comment.
“They (Congress) are well versed on these issues …”
I should say NOT! How do you think we got into this mess? I lay the blame for this meltdown primarily at Congress’s feet! Wall Street has run circles around Congress for years. The only reason we know the causes is that people OUTSIDE of Congress told us what the causes where. Congress (albeit Republican) failed to regulate derivatives in the late 1990s. Does that indicate Congress knew what was happening? Nevertheless, there is enough to go on to legislate effective regulations, if only Congress has the will to do that. If only Congress would come to remember who they represent.
James, how do you know that’s “not Davidson’s intent?” Maybe it’s precisely his intent. Read this transcript of his interview with Elizabeth Warren before making up your mind. And I was by no means the only one who was outraged.
As “overdetermined” as the crisis is, I would suggest that you left out two other cause in your list of contributors: namely the complicit consumer and the policy of homeownership for all propogated by our political leadership. Specifically related to the promotion of home ownership were the huge number of guarantees made by Fannie and Freddie which allowed the various parties to aggressive lending to take their cut and then toss the hot potatoes of risk down into the seemingly bottomless root cellar of the US Government.
UnRulley,
Sorry, I tend to be over-sensitive. Just tired of the Republican’s BS propaganda. It’s hard to tell sarcasm online sometimes. I know ’cause I tend to be the smart-aleck myself and it gets misread sometimes. I was ready to get my elephant gun out for your next comments, haha.
The more I’m learning about Adam Davidson the more I hate him. I guess he thinks he’s the Rush Limbaugh of NPR or something. It’s like “Hey Davidson, take it over to a.m. radio. I think they’re just illiterate enough for you pal.”
Actually, James, I agree with Barney Frank, except that I also believe that there should be some kind of permanent commission set up continuously consider the state of the financial industry and its impact on the economy. The idea of having a commission, kind of like the one now under Elizabeth Warren, but even more independent, would put many of us at ease, and could be very useful in tweaking regulation on an ongoing basis.
The comparison is flawed, I think. He is talking about this group: http://www.pewfr.org, not the congressional one.
I don’t think that the analogy necessarily holds. In the first place, I think that two years after 9/11, most people in the intelligence community probably knew how the hijackers had done it.
But more obviously, the overdetermination of the crisis is the point. I mean, you say the global savings glut, I say the long house prices position of RMBS holders. But examining all the aspects of the bubble and making sure that they are regulated away in the future is unlikely to prevent the next bubble, unless the next bubble is exactly the same as the present one.
Is anyone in government looking at this as a bubble — as an event that will happen again, that is almost certain to happen again, given that our prosperity depends upon the reflation of the economy and the gains of the financial sector? I think that they should. Preferably, it should be a team of experts (economists, lawyers and accountants) drawn from academia and the FIRE sector itself. Andrew Lo in his congressional testimony on hedge funds and systemic risk recommends the model of the National Transportation Safety Board (NTSB), and I think his suggestion is a good one.