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About The Hearing

The Hearing provides a forum for discussing the key economic policy questions being debated in Washington. In a typical week, we will highlight Washington's actions on a topic of economic significance, such as economic stimulus, taxation, financial regulation or the auto industry bailout.

This blog will include previews of congressional hearings, key speeches, Washington-based forums and anticipated congressional action on economic policy, plus an analysis of the events after they occur. Articles in this blog will be written by the moderators, Simon Johnson and James Kwak, but we also expect guest contributions from economists, commentators and other experts. In this time of economic disruption, Washington has an important role to play in helping us understand how we got to this point and in designing the playing field for our economic future. Our goal is to give you greater transparency and insight into how that job can be done.

Johnson is former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a co-founder of the Baseline Scenario.

Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of the Baseline Scenario.

By James Kwak  |  April 20, 2009; 12:00 AM ET
Categories:  Banking , Global Economy , Regulation , Your Hearing  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Next: Is Big Finance Too Big To Save? Joint Economic Committee Hearing Tomorrow


Are the banks not lending to businesses and people with decent credit, so that they'll have enough money to be able to pay back the TARP, and keep their high salaries and bonuses -- thereby increasing unemployment and depressing housing prices? Is there a direct connection or is it more complicated than that?

Posted by: anonymous57 | April 20, 2009 11:08 AM | Report abuse

Several ideas have been floated for attempting to prevent new fiscal horrors from occurring in the future. One is that a severe regulatory system be put in place, one that will stop CDOs or rampant mortgage abuse. Another is the idea that these institutions should not be allowed to become "too big to fail."

Neither of these will work: contractual obligations will be created that go around any finite number of new regulations, and will form faster than the regulations can be written to regulate them, because we don’t write new law until bad symptoms occur. Institutions will always be allowed to join forces and to "compete" in the same markets, thereby able to form a virtual entity in the system that may itself become too big to fail - and thus the sum of its parts, those institutions that form the financial entity, will have to be protected as AIG was. [Imagine the parts of AIG all splitting the contractual obligations of the old AIG business; wouldn’t the group of subsidiaries have been too big to fail just as the whole AIG was?]

Therefore, new regulations monitoring CDOs and the like will not help, but simply push the problem aside to a new type of financial contract to be created by our legal/financial geniuses who desire new multimillion dollar bonuses.

The solution may be to have a federal financial monitoring force (FFMF). Such a force would have the authority to investigate any contracts that might incur obligations larger than some lower limit, perhaps ten million dollars. Any group of contracts which total over that amount would also be subject to inspection. The FFMF would take no action if similar contracts across the economy do not, as an aggregate, total more than ten billion dollars, but they would be able to monitor the growth of any aggregates. That is, they would categorize these obligations as to their ability to survive a “stress test.” Once aggregates total in the tens of billions, federal officials would be obliged to take notice. The sensitivity of the aggregate to market forces (stress test results) would be calculated. Danger signs might stimulate action. Such action may be authorized by anticipatory regulatory laws written for this purpose during 2009 or 2010, or new tailored laws might have to be written to target the growing danger. Corporations attempting to hide such contracts/obligations might be found out by use of an appropriate whistle-blower law.

Such laws would be written to ensure no tidal wave of some new type of economy-wide entity (think CDO or subprime mortgage agglomeration) forms which might threaten the liquidity of the system by taking all the water onto some rocky shore.

This solution allows the markets to operate freely and does not regulate any type of contract which does not, in the market as a whole, threaten to adversely affect the entire economy.

Posted by: EGoldberg1 | April 20, 2009 11:44 AM | Report abuse

Considering these are the same sleazebags who watched the whole financial situation go down the commode while they counted their gratuitous campaign contributions, having them supervise anything more than a kindergarten would be ludicrous! The need for TERM LIMITS IN CONGRESS has never been stronger than right now!

Posted by: GordonShumway | April 20, 2009 12:41 PM | Report abuse

In your opinion,
will asset market extreme mispricing be well-deterred,
if and when
asset market real price histories are well-apparent to the people?

Robert Shiller’s

Posted by: ttsmyf | April 21, 2009 9:38 AM | Report abuse

You need to get the washington post to get the RSS feed up and running for this Blog. It is currently not working.

Posted by: NicholasWagner | April 21, 2009 9:38 AM | Report abuse

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