Finally A Call For A Congressional Investigation

Say what you want about US Speaker Nancy Pelosi, but she has just floated a very reasonable idea of having Congress investigate the cause of the financial crisis (presumably somewhat deeper than just noting greed and fraud).  Bloomberg is reporting that House Speaker Nancy Pelosi plans to push for a comprehensive inquiry.  You would think that prior to legislating new laws and regulations Congress would have already called for an investigation into the causes and practices of the financial industry.  Unfortunately, not all in power agree.  In his typical "Barney Knows Best" approach, Barney Frank, chair of the House Financial Services Committee, proposes legislating first and then holding hearings to justify the new laws he proposes.  

It is exactly that type of arrogance that has resulted in the shift of losses from investors to taxpayers and the resulting delay in recovery.  Had Congress held hearings before approving the TARP legislation, it is unlikely that it would ever have been passed.  We now know that the expert panel appointed by Congress to oversee the TARP fund stated that subsidizing financially troubled institutions results in a delayed recovery, but permitting orderly liquidation while painful, results in a quicker recovery and a more robust economy.  (See $4 Trillion and Nothing to Show for It.)  Legislating with prudence after careful consideration of all relevant facts and the likely effects of the proposed regulation results in better law and more workable solutions.  Legislating on the fly only results in a poor and confusing patchwork of red tape that is bound to have unintended consequences that forethought could have avoided.

What is truly unfortunate is that the rush to regulate by this Congress will undoubtedly stifle the free market and substitute Barney Frank's ideas for collective best practices.  Legislation needs to focus on maintaining transparency and punishing deceit rather than substituting the judgment of business folk with that of politicians.  

My hope is that hearings will happen and will ferret out the truth about the extent of the fraudulent and questionable practices occurring on Wall Street (and Main Street), but also explore how greater transparency in this day and age is possible.  Indeed, more frequent and more accurate disclosures may have prevented the crisis in the first place (albeit at the cost of cutting short the recent economic bubbles - which were probably not real in the first place).  

Perhaps the hearings will also force the Treasury and Fed to be more open and transparent with information as well, such as bank ratings.  The Treasury is reluctant to disclose information on banks for fear of causing a run on banks, as happened in the Great Depression.  It is, however, rumor and innuendo that cause runs on banks (and thus runs on the taxpayer funded FDIC fund).  If banks were forced to disclose their assets and liabilities, leverage ratios, loan loss reserves, etc. on a weekly (or even daily) basis to the public, the depositors could make an informed decision as to the safety of their funds.  It won't prevent banks from becoming insolvent or from making bad loans, but it will allow individuals to save more of their deposits at an earlier date.  Maybe the hearings will also result in some other common sense provisions, such as increasing FDIC insurance premiums for banks that assume more risk than conservative banks.  Bad drivers pay more for insurance than good drivers (in most free market states), why shouldn't bad banks pay more for deposit insurance than good banks?