Jan 07, 2009
We have been trying to make head or tail out of the financial debacle for weeks now.¹ Two reports have been released in the recent past by the Treasury Department, attempting to explain what they have done with the money and with the power conferred upon them by Congress last fall. One report was sent to Congress² and one to the Congressional Oversight Panel³.

We diligently attempted to read both of these reports but had to conclude, along with poor Casca, that “it was Greek to [us].” One recalls the “Plain English” laws passed a few years ago in the realm of public contracts (insurance, etc.), and wonder whether we should not pass one for the federal government. Obfuscation, of course, is an important tactic used by the guilty to hide their shame, and one can only conclude that the dense unreadability of these reports is intentional and so motivated. Our frustration level was so high that we send a heartfelt message to Paul Krugman begging him to read the reports and translate them for us common mortals.

In the meanwhile, the New York Times published a pair of op-ed pieces last Sunday entitled The End of the Financial World As We Know It, and How to Repair a Broken Financial World, by Michael Lewis and David Einhorn, which added some to our understanding of what went on and where we go from here:

• The world has seen the last vestige of faith in the U.S.—that we at least knew how to handle money—destroyed in the recent cataclysm, and it has shaken the world to its foundations.
• The Bernard Madoff scheme was suspected by many people, including those who benefited from it, many years before the scandal broke, and the S.E.C. was warned about it explicitly nine years ago. Their failure to do anything about it reveals the absence of check and balances in the system.
• The system requires CEOs to manage for the short term, but our common welfare depends upon a healthy long-term financial establishment, and that is where regulation and oversight come in. Dismantle them, and the result is as predictable as it would be if you were to suspend all watchfulness and release all constraints on your infant or, more terrifyingly, on your teenage son. Say the authors: “The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.”
• The credit-rating agencies (e.g., Moody’s, Standard & Poor’s) failed to red-flag the increasing risk taken on by the issuers of bonds. The fact that those issuers pay for the operation of these credit-rating agencies may be part of the problem. “[R]ather than expose financial risk [the credit-rating agencies] systematically disguised it.”
• The SEC is fraught with conflicts of potential interest and political sensitivities that keep it from doing its proper job. Its enforcement division is a revolving door into high-level positions at companies whose activities it is supposed to enforce.
• “And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change ... any of the ... bad incentives that led us here in the first place.”
• Meanwhile, the seven bailouts and six strategies entered into so far have not produced the confidence in the financial markets, or opened up capital for lending, which they were primarily intended to do.
• A $306 billion giveaway in guarantees to Citigroup is equal to the combined annual expenditures of six federal departments.
• The law of unintended consequences has hit the financial bailout program hard. While the miscreants are being rewarded, the innocents (small solvent companies) are being forced out of business by their creditors.
• The authors suggest two solutions to the mess: “A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.”

The authors suggest additional intelligent changes to the system, and conclude, “[T]here’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.”

The moves the Obama administration makes on our financial establishment in its first days—its first hours—will tell the tale on whether regulatory renewal will be substantive and effective, or merely cosmetic. Stay tuned.
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¹ See also How We Got Here and Where We’re Going and Slouching Toward Accountability.
² Report to Congress Pursuant to Section 102 of the Emergency Economic Stabilization Act (.pdf, 8 pp., 31.8Kb), Accessed, as were other footnoted items today, on January 4, 2009
³ Response to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization (.pdf, 15 pp., 115Kb)
tags: Economics | Business | Governance