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A Commission on the Economic Crisis?

Earlier this week, the Senate passed, by a vote of 92-4, a measure that would create an independent commission to hold hearings into the causes of our current economic crisis - and presumably to think hard about what to change (about laws, regulations, and everything else) going forward.

Speaker Nancy Pelosi has also come out in favor of some sort of commission, although her exact position is unclear and there are obviously important negotiations going on behind the scenes.

Many big questions are immediately on the table, including: What should be the scope of an inquiry, will it have subpeona powers, and who will run it? The potential model is the 1932-1933 "Pecora Hearings", which uncovered wrongdoing on Wall Street and laid the foundation for major legislation that reformed banking and the stock market. But the world has changed in many ways over the past 70 years.

How should you apply the lessons from Pecora to today? For a start on this question, take a look at the preview materials for Bill Moyers' show tonight - this is a discussion between Bill, Michael Perino (an expert on Pecora; writing a book) and me. (It airs at 9 p.m. Eastern in most markets; on the web from about 10 p.m.)

Make yourself heard on this issue. Although this blog is less than a week old, it is already receiving the right kind of attention on Capitol Hill - some of our content was mentioned (and one of our questions was asked) by Sen. Amy Klobuchar (D-Minn.) at the Joint Economic Committee hearing on Tuesday. We'll follow the economics and politics of all these ideas as they move in and out of Congress, with a focus on coming up with constructive suggestions - from you.

My analysis and proposals are already in the mix (free on-line Atlantic article, detailed discussion of events/policies, primer on the crisis) - and reactions are very welcome.

But you can pose any kind of sensible questions here. Formulate these however seems appropriate, but I would strongly encourage developing specific lines of questioning - who should be called as a witness, what should they be asked, and what would the follow up questions be?

Ferdinand Pecora had a goal, which was to help people see through the complexities of Wall Street, to get a sense of what had gone wrong and - most difficult - begin to build an agenda for serious reform. Let's try to do the same.

--Simon Johnson

By Simon Johnson  |  April 24, 2009; 7:57 AM ET
 
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Comments

Simon,
Having followed your other blog, it is nice to see you getting some recognition here.

As to your question - I am not in favor of another commission. That's an old school bureaucratic response to something that someone doesn't want light shed on quickly. In today's new media environment, I think the bloggers, some tech savy federal law enforcement agents, and (dare I hope it) a couple of good indepth print media investigations can probably do the trick. Oh wait, the Post already did such an investigation.

Seriously, if there were criminal acts, they need to be investigated by law enforcement. If there were acts of moral stupidity, those are probably already known, and can't be corrected by a commission anyway. Only public shame and economic punishment will correct those.

So no more commissions. No more hiding behind weasily language. LEt the existing institutions and structures actually do their jobs.

Posted by: kcsphil | April 24, 2009 8:28 AM | Report abuse


The only way for these hearing will have any credibility would be if members of congress are required to testify under oath. It was under their watch, changes in lending laws and lack of oversight that the current situation exists. It is time to hold everyone accountable no matter where it leads including congress. They are not exempt.

Posted by: FormerNewYorkerNo9 | April 24, 2009 8:36 AM | Report abuse

I support kcsphil's view that we need clarity now, while the public still retains its anger over what has been happening for too long. Simon Johnson is the voice most clear about the systemic rot and corruption in finance, to say nothing of the blatant arrogance and defiance of federal authority. Internet conversations will help elicit contributions from people who can meaningfully inform the discussion and aid in publicizing the need for major reforms.Since only Congress can pass laws there will have to be that level of inquiry, but public input from informed sources will make the Congress' job easier.

Posted by: gbocknek | April 24, 2009 8:58 AM | Report abuse

Defining the things elementary school kids do to each other as torture is the ultimate feminist wimpification of America.


It has nothing to do with morals.

Putting a caterpillar on someone's shoulder (done everyday in the school yard)

dunking someone's head under water. (Done every day in pools across the nation by school kids adolescents and adults. It may get a whistle blown by teh lifeguard, but it's not torture!)

Playing a Celine Dione Christmas CD so you can't sleep at night. (This might be torture to many, but it is not real torture)


This is just a smokescreen to take attention away from Obama's falling numbers from his mad rush to socialism!

Obama Lies... Americans Die!


Posted by: StarsAndStripesForever | April 24, 2009 9:03 AM | Report abuse

Hearings? What a joke! We hardly need yet another round of wasteful, useless grandstanding and partisan finger pointing. Don't our elected leaders in congress actually have anything better to do? I suggest a more proactive approach to getting us out of the mess they got us in. Let them insulate themselves from their own blame in their home districts at election time. Better still, why don't they just go back to their "constituents" for good and let the adults run the country.

Posted by: markie_de_sade | April 24, 2009 9:08 AM | Report abuse

It seems that at least 2 flaws in the securitization model contributed to their ultimate collapse and consequent financial market turmoil. 1. The interests of the originators, investment banks, and credit agencies were misaligned with the ultimate security owners. 2. In the event of a downturn there was no efficient mechanism to unwind the securities and mediate between interests of the different tranches so that the value of the underlying asset could be best preserved.

It now seems that the Fed and Treasury are trying to reignite the securitization market. How have these problems with the securitization model been addressed? Incredibly and with all of the turmoil and devastation that has transpired, and with the incredibly enormous sums of taxpayer funds allocated to try and stabilize the markets, are we just repeating the same mistakes again - but this time with explicit government guarantees? Are we doing anything differently?

Also, I wonder, given human nature, whether the first problem can ever truly be addressed if originators end up carrying zero exposure from their originations.

Posted by: EliC | April 24, 2009 9:09 AM | Report abuse

dems want hearings as long as it doesn't implicate dems...
truth is, this is a distraction and a witchhunt...
people, ask the congress about jobs and the economy, tell them hearings is bs, tell them to improve the lives of Americans...
tell them on election day 2010 you will be giving them a reportcard, and if they measure up, they will be out of office...

Posted by: DwightCollins | April 24, 2009 9:12 AM | Report abuse

If anyone thinks Congress is really going to investigate and point fingers where the blame should be they are Brain dead. The politicians are the root cause of this mess their pressure on banks to make loans to people that should never had loans that had no means or intent to repay caused the problem. Wall street and the banks just figured out how to profit from the insanity forced on them by the Worthless/Corrupt Politicians!

Posted by: american1 | April 24, 2009 9:14 AM | Report abuse

Forget hearings. Just play reruns of the Gong Show. The reruns will have more integrity and relevance and we don't have to put up with the pomppus, pious posturing of a bunch of political crooks syphilitic crackpots.

Posted by: JoeDBrown | April 24, 2009 9:42 AM | Report abuse

Barney Frank will welcome an investigation into his role in the housing debacle.......

So will Chris Dodd.

Posted by: georgedixon1 | April 24, 2009 9:47 AM | Report abuse

I'd like the committee to ask: To what degree did the trade imbalance contribute to the size of the crisis? How much did investment demand from surplus dollars abroad lead to increasingly risky loans and to the proliferation of CDOs based on CDOs based on CDOs. Is there a means of measuring the contribution of the trade imbalance on the overall problem?

An adjunct to this question would be an exploration of how to decrease the magnitude of investment pressure that results from the trade imbalance. President Obama is taking steps in this direction with his incentives encouraging industries concerned with current US needs-- ie, renewable energy development, etc. What else can we do to decrease the trade imbalance?

Posted by: aimzzz1 | April 24, 2009 9:57 AM | Report abuse

-One interesting aspect of the present situation is that newspapers are collapsing at a time when their input on financial/political-economy is most in need.
-Most of the television news concerning the financial debacle has been of poor quality. Where the quality has been better , the breadth of treatment has been less.
-The ideological deadlock between 'free-market fundamentalists' and the Washington/NewYork elites has obscured the fact that the policies of both have conspired to subvert market pricing ... the efficiency of which is the supposed justification for the superiority of free-market capitalist- over socialist-regimes.

- Congressional hearings ought focus on how both in the previous (Y2K)Enron/Dotcom and present Housing/Financial Great Recession (2008-):
(I) Accountants , Analysts and Rating agencies Failed in their assigned mission to provide accurate information to direct market activity. Legal regulations allowed conflicts of interest and did not clearly proscribe disinformation.
(II) Well-meaning government policies designed to further (a) Internet business innovation, (b) Utility competition and electric power innovation , and (c) Housing Access for those whose incomes are too modest to influence housing industry policy, All Promoted Fraudulent Misallocation of funds, Because they did not adequately oversee (or anticipate) corrupt influences on markets, and inadequate reporting/transparency requirements allowed limited problems to bloom into vast sectors of waste.
(III)The ClintonBush de-regulations of concentration (Glass-Steagal) counterparty/margin requirements (re commodity/derivatives) , and Greenspan's loose margin/reserve requirements (and minimal interest rates) enabled run-away 'markets'.
These "Bubble Economies" only create false value via inflated prices. We -management,labor,bankers(even illegal immigrants!) - want a political economy which invests in productive assets which provide long term returns (as opposed to speculative financial bubbles).
The populist venom should be directed toward correcting flawed policies and practices , not vilifying individuals whose employment featured conflicting interests.

Posted by: tbhpmci | April 24, 2009 9:59 AM | Report abuse

Subjects of interest for ANY investigation (I'll take whatever I can get at this point - but whatever it is, it needs subpeona power):
-Regulatory Capture - as you showed very clearly in the Quiet Coup article (Phil Gram, Robert Rubin, Lawrence Summers, Hank Paulson are all poster boys for this)
-How deregulation fueled this crisis, the Financial Services Modernization Act and the Commodities Futures Modernization Act in particular
-a critical reexamination of the Too Big To Fail doctrine and its Moral Hazard implications
-a close scrutiny of the actions of the Federal Reserve and its balance sheet as well as its role and loyalties in the economic system. Is the Fed beholden to its member banks or the US as a whole?
-SEC enforcement questions - are new regulations required or is enforcement of existing regulations sufficient to avoid such catastrophe in the future (since enforcement has not been present for years).
-A sober look at what it means to return to "normal". Is "normal" the credit fueled overconsumption or the past 15 years or is there a different sustainable normal that we have yet to consider
-An examination of the role of credit in our economy. Is credit the "lifeblood" of our economy? This idea is accepted as self-evident without any critical thinking being applied. Shouldn't production/value creation be the lifeblood of our economy?

Its a long list, but then there's a lot wrong with our economy and how we are handling it. I support ANY efforts to address these issues, even if they are bureacratic and slow. I resist any efforts to claim that this is an emergency and something must be done now no matter how ineffective and ill advised.

Posted by: pimpinbenzo73 | April 24, 2009 10:28 AM | Report abuse

The most useful product that could emerge from such a commission would be some kind of Financial Emergency Management Protocol, the rules of which would be known in advance to all players in the next economic crisis.

It seems there are only two ways that a representative Democracy can react to crisis. One is essentially reactive - writing a black check of funds and authorities to the Executive to use with a maximum of discretion and the unpredictable, ad hoc improvisations we have all recently witnessed.

The other is to have a system in place tasked with responding to catastrophe in a predictable fashion, debated in advance, refined over time, and preserving the rights of all interested parties in a transparent manner.

Just like the military has contingency plans for martial threats, and FEMA has plans (hopefully better after Katrina) for disasters, perhaps a permanent section of the Treasury, or the Bankruptcy Courts or US Trustees, the Fed or some new independent agency could be authorized to develop plans for coordinating the vast bureaucracy in responding to large-scale economic disruptions. Kind of an FDIC for national-scale disturbances.

Regulations can be helpful - like building codes that help houses withstand high winds - as are agencies tasked with monitoring storms, the reporting of which greatly reduces total damage.

Yet, I am skeptical that we can finesse our system to either foresee or forestall the next financial "F5". Maybe next time we'll have trained teams of fiscal first-responders.

Posted by: Indy2009 | April 24, 2009 11:08 AM | Report abuse

As with other hearings efforts, one motive is always a search for a scapegoat by people who have an excessive belief in their own virtue and a need to find someone to blame for difficult problems. The more this aspect of the investigations can be avoided the better. But it is clear that part of our current economic crisis is a result of a collapse in the financial system and that substantial changes in the system of laws used to regulate financial markets are needed to reduce the likelihood of a similar event in the future. This requirement surely implies the need for a thorough congressional investigation of the factors that lead to the financial system collapse to inform the process of developing the new regulations. Certainly supeopa power should be available to the appropriate congressional committees if, as is likely, it is needed to fully reveal the problems that lead to the financial system collapse.

Posted by: dnjake | April 24, 2009 11:17 AM | Report abuse

Dear StarsndStripesForever -

Wrapping yourself in the flag will not dress up a bad idea to hide the ugliness of your ethics. In fact, it merely disgraces that flag because you wrap it around everything which that flag does not represent.

Thanks for your enlightening observations about our economic crisis, how to get out, and how to make sure that it never happens again.

Oh wait.

I guess not. :-)

Your racism and hatred do shine through the flag that you hide behind.

Posted by: 3stooges | April 24, 2009 11:19 AM | Report abuse

So, there will be another useless, wasteful "commission," attending many lavish "working" meetings and holding a few hearings, to find the cause of a problem that the "commission" knows about and is part of. All that will come out of this is a professionally prepared, 3,000 page report that no one will read, in a colorful binder.

There are too many lobbyists, gifts, too much money, and too many 2010 re-election campaigns, for this to have any credibility.

Posted by: PhillyEagles | April 24, 2009 11:35 AM | Report abuse

I have little faith in government commissions after the 9/11 commission. That report was written like a novel, episodes of heroism interspersed with the already accepted story. It was only much later that John Lehman of the commission admitted that several aspects of the report were false, such as Saudi citizens using our restricted airspace and the number of warnings that the airlines, and by extension our intelligence services, actually had. This was, of course, announced on a weekend, the notorious time when American ADD kicks in. I don't see the commission being willing to step on any toes, much less produce circumstances where wrongdoers are prosecuted. Our government has had one breathtaking failure after another in this decade. The economy is most certainly one of them. They won't be inclined to punish themselves. When have they ever been so inclined?

Posted by: curtb | April 24, 2009 11:52 AM | Report abuse

If the goal of the Commission really is to determine how this happened and make recommendations on new regulatory structure going forward, then they will need subpoena power and sworn witnesses. Sunshine really is the best disinfectant for this mess. Also, there is plenty of blame to go around, but pay particular attention to the corruption in the ratings agencies.

Posted by: ordinarycitizen1 | April 24, 2009 11:55 AM | Report abuse

Yes the world has changed over the last seventy years from the days of the great depression. The US is more dysfunctional now.

Posted by: Maddogg | April 24, 2009 12:19 PM | Report abuse

Earth to starsandstripesforever:

W and his merry band of conservaturds spoke the lies that made Americans die.

Your mission is aborted. Time to return to reality.

Posted by: Garak | April 24, 2009 12:44 PM | Report abuse

Human nature doesn't change over time...bankers have been and always will be greedy, non-credit worthy borrowers have always tried and will continue to try to get credit they shouldn't, brokers always have pushed and will push products to get paid and politicians have always written and will continue to write legislation to curry favor with large donors. The question is: What was different this time? In my mind, the general perception of and pricing for risk. Not sure who you blame for this...but I'd start with the credit rating agencies. But it's in the response to the crisis in my opinion where you'll find criminal activity. AIG bonuses of over $1MM to traders that created this mess? How can I ever take anything from the administration seriously again? Billions in losses at Merrill that weren't disclosed to BoA shareholders voting on whether to buy the company or not? Did Bernanke think this was not material information? In summary, credit rating agencies = stupid. Deregulation = stupid. Bernanke,Paulson,Summers,Geithner = criminal.

Posted by: DesolationRow | April 24, 2009 1:08 PM | Report abuse

Hmmm I wonder?.... Maybe start with... This is right' THAT is wrong. Guys... HEY! guys. Stop lookin' at your shoes, STOP fidgeting.... DUHHH DER! Stop being such a bunch of MANICAL tightwads!

Posted by: deepthroat21 | April 24, 2009 1:43 PM | Report abuse

The present concentration of Economic Power into the hands of a non-elected few is against the basic principles that led to the creation of the USA.

During the 20 th century, Economic Powers developed a flawed financial intermediation model. The remedy to overcoming these flaws was a derivatives market. The crises developed when that became over sized and out of control.

The Economic Powers have been able to control the US Government and pour trillions of tax payers money into what is likely to be a futile attempt to save their failed system.

Investors can not be expected to put their money into a system that does not effectively direct it to the most productive capital investments. They are even more reluctant if they have previously lost money. Particularly, they will not trust a system that is perceived to be susceptable to fraud.

The present financial system needs to be completely re-thought and not just tuned up with regulations designed by the Economic Powers. De-centralized economic decisions would provide the means for more Americans to reach their inherent potential and become a desired destination for investment capital. The American middleclass is the best educated and has access to the most resources in the World. We need to take advantage of that.

The Independent Commission should ask how the present concentrated financial system developed and is it applicable at all to the 21 st Century. They can determine if a distributed system better meets the needs of the American people and not just serve the Economic Powers.

Plutocracies have short lifetimes!

Posted by: LDFraley | April 24, 2009 2:57 PM | Report abuse

The present concentration of Economic Power into the hands of a non-elected few is against the basic principles that led to the creation of the USA.

During the 20 th century, Economic Powers developed a flawed financial intermediation model. The remedy to overcoming these flaws was a derivatives market. The crises developed when that became over sized and out of control.

The Economic Powers have been able to control the US Government and pour trillions of tax payers money into what is likely to be a futile attempt to save their failed system.

Investors can not be expected to put their money into a system that does not effectively direct it to the most productive capital investments. They are even more reluctant if they have previously lost money. Particularly, they will not trust a system that is perceived to be susceptable to fraud.

The present financial system needs to be completely re-thought and not just tuned up with regulations designed by the Economic Powers. De-centralized economic decisions would provide the means for more Americans to reach their inherent potential and become a desired destination for investment capital. The American middleclass is the best educated and has access to the most resources in the World. We need to take advantage of that.

The Independent Commission should ask how the present concentrated financial system developed and is it applicable at all to the 21 st Century. They can determine if a distributed system better meets the needs of the American people and not just serve the Economic Powers.

Plutocracies have short lifetimes!

Posted by: LDFraley | April 24, 2009 3:41 PM | Report abuse

A Commission will just be used to misdirect the public from the fact that Congress, the Executive Branch, and the Judicial Branch all worked together in harmony to bring us down to the point we are.
EXEC - Bush sent our jobs and mfg offshore to India and China in order to get them to fund his war. It was that or ask the public to take a 200% tax increase so he could have his "legacy".
Congress - Approved and passed the Bush Tax Cuts which allowed companies offshoring facilities and jobs a 0% tax rate, thus forcing them overseas whether they liked it or not.
Justice dept- Stood idly by as US citizens were basically legally raped financially by CC companies, Wall Street, Banks, Lenders, Mortgage companies and anyone else who wanted to fleece US citizens.

This is only one of many moves that all three branches of government made in concert to damage (intentionally or unintentionally) our country.

We are not as vulnerable to terrorists as we are vulnerable to our own government. They have done more destruction to millions of Americans than Al Qaeda could ever have dreamed of.

Any commission formed should be one of criminal investigation for treasonous acts against the American people committed in the name of corporate profits, and criminal investigation into government hidden agendas and catering to lobbyists and special interests.

More than likely most of congress, the past executive branch, and half the justice department should all be imprisoned for treasonous acts against their own country.

That is what a commission would find. Treason. What it would accomplish is nothing without indictments for those treasonous acts. Making a treasonous policy against the US public a "law" in congress should earn the congress who passed the law a life sentence in Gitmo.

Posted by: david771 | April 24, 2009 5:40 PM | Report abuse

Since the major players all hedged their bets using mathematical models—whose validity in relation to the real financial world is, to say the least, far from established—I suggest the any prospective commission should have some effort and capability to thoroughly examine how these models are implemented on Wall St.

The commission should have a physicist or engineer who is not a professional quant. Someone who is experienced in comparing models to real world data. I'm a physicist myself who had no interest in financial affairs until Sept of last year. But it's not hard to come up to speed rapidly on quant basics (Black-Scholes, geometric Brownian motion, Gaussian copulae, etc.). As a colleague of mine said recently, "Some economist really won a Nobel Prize for the diffusion equation?"

What's shocking is how little critical scientific attention was paid to how well these models actually fit the real world. Just because you can write down a pretty formula doesn't make it true.

Posted by: cwnsvn | April 24, 2009 9:47 PM | Report abuse

Focus on how it's possible for financial institutions to hold the economy hostage. We deserve a functional system in return for the ransom we are paying.

At each level, what mechanism could have made the players and their companies responsible for their own risks and losses? How do we make our institutions strong enough to say "No" the next time people scream that the regulations are obsolete relics that interfere with free enterprise?

Posted by: aimzzz1 | April 24, 2009 10:53 PM | Report abuse

Thank you Bill Moyers for providing your medium. William K. Black for getting this off the ground and, Simon Johnson and Michael Perino for being equally brave enough to speak out against government corruption.

Simon, you've asked for remedies so here's my two cents.

1) S-900 passed by the 106th. Congress in 1999 allowed for the merging of banks, securities and insurance firms. Repeal S-900 with no grandfather clause.

2) Give states the ability to enforce anti-predator laws such as the GFLA. Georgia passed the GFLA in 2002. It became law that October. In November, the Governor lost his re-election bid. By March 2003, the new Governor had gutted the law. Wall Street and K-Street money backed the new governor. Gee, I wonder why?

3) Accountability, prosecute any and all CEO's, CFO's and general council who allowed massive fraud within their organization.

4) Any lobbyist or lobbying firm who was engaged in, or assisted in the gutting of state laws against predatory lending such as the GFLA are banned for a minimum of 20 years from any governmental lobbying of any kind. This would include lobbying any government within the United States or its Territories even if the lobbyist is employed by a foreign firm.

I wrote a piece that was published here:

http://www.opednews.com/articles/U-S-Corruption-Runs-Rampa-by-Steven-Thompson-090421-440.html

There a links to follow to learn more about the GFLA...

Thank you again! And, A BIG Thank You to the Washington Post for opening up this medium for the truth to pour out...

Steven Thompson
Independent News Services

Posted by: mediareformer | April 25, 2009 2:40 AM | Report abuse

I'm for a big flashlight, and it needs a commission. AIG's behaviour needs to be investigated. Cassano needs a subpoena. CDS's & CDO's need to be explained. Goldman Sachs's benefits from the AIG bailout needs to be explained. The bonuses need to be talked about. People need to understand that this didn't happen because of irresponsible consumers, it happened because of irresponsible bankers and "insurers," if you can call them that. We need to get at the bad practices and the compensation, but we also need to deeply get at the fraud. If the public can begin to understand that too big to fail means too big to exist, we're getting somewhere. Citi, AIG, Goldman, Wells Fargo, among others, are too big to exist. These companies should be broken up into smaller ones. And anti-trust measures need to be beefed up so that the kind of collusion that caused this can't do the same in a decade or a generation.

Probably the most important thing, as far as public understanding goes, is a thorough investigation of the ratings agencies. The current situation has to be dissolved, and the public needs to understand why.

David Fox,
Musician (now on the verge of homelessness) who used to work as a graphic designer in the financial industry before he got laid off.

Posted by: dfox11 | April 25, 2009 6:09 AM | Report abuse

Dear Mr. Johnson,

I watched your PBS appearance on April 24th
alon

Posted by: ladeira9yahoocom | April 25, 2009 7:08 AM | Report abuse

Dear Mr. Johnson,

I watched your PBS appearance on April 24th
alongside Mr. Perino...very enlightening,
if frightening. You did well to gently correct Mr. Moyers' opening remark, "...this is the greatest financial crisis since the Great Depression..."--Whatever happened to the severe U.S. recession of 1979-1982? Unemployment is NOT now one out of four, most of the banks here aren't closed.

Few "experts" mention mass psychology: if the "punditry problem" panics too many average Americans, they will behave unwisely, (read badly) and hard times will deepen. I actually believe this phenomenon has contributed to unemployment, akin to
perceived scarcity hoarding, "Fortress America", the Survivalist Movement, etc.

This dramatic media over-correlation of 2008-2009 to the '30s has irritated me to the point of creating my own blog, (Errors Explored and Revealed), a thing I swore never to do.

Please continue your quest for the facts-- accuracy has seldom been more important than it is now.

Best Regards,
Amber F. Ladeira
amberladeira.blogspot.com

Posted by: ladeira9yahoocom | April 25, 2009 7:09 AM | Report abuse

How is a commission going to address the financial lobbying that has surely contributed to the protection of the financial industry.

We will be asking Congress to do away with their meal ticket.

But the influence peddling has to stop.

Posted by: finally1 | April 25, 2009 7:39 AM | Report abuse

I also watched Bill Moyers' Journal last night, and wished it could have gone on longer.Very interesting. I would favor new "Pecora Hearings" if there was a way to include Congress on the other side of the mic. Is there anyone around now with the talent and without the taint of corruption who could investigate and question the industry? I'm afraid members of Congress would not be willing to implicate themselves. It seems that they have been willing partners in the growth of Wall Street influence, size, and complexity at least since 1981. That relationship might hollow out any meaningful legislation and regulation, as it has for the last thirty years. One man's lobbying is another man's bribery. I think you are on the right track in focusing on predatory lending practices. The fees and rates for late payers make loan sharks look like sissies. The high level of marketing to college kids as soon as they arrive on campus, on their own for the first time, is astonishing. they can dig themselves a deep hole before they even sober up and go to their first class. likewise in the mortgage lending. Expecting everyone, regardless of education level, intelligence, or language barriers to read all the fine print while they are signing in forty places is not realistic. it seems that lenders are willing to do whatever they can get away with, which does not exclude very much. So those are my two main areas of focus, the unhealthy codependency between banks and legislators, and the runaway predatory practices. The third thing that should come out of any investigation is anti-trust enforcement and getting separation between high-risk and low-risk vehicles. Huge, huge banks with overwhelming risk is risk for all of us. It should be someone's job to disapprove mergers and blow the whistle on the type of risk that could harm the overall economy. I know the the head of the S.E.C. under Reagan tried to blow the whistle, but was quickly overruled by the rabid deregulators in the administration. So who , among our trusted institutions, is not part of the problem?

Posted by: oldblevins | April 25, 2009 10:23 AM | Report abuse

Thank you and Mr. Perino for the clarity you brought
to a wide range of related topics last night. During that appearance with Moyers I learned of this blog.

I do hope your voice is heard in the corridors of power.

There are voices like yours that speak of oligopolies as a danger to the competitive model [and in turn creating oligarchies thatdo harm to the best interest of the public] that are not being attended to by either the Admin or the Congress or the loyal opposition. I was graduated from law school in 1967 when anti-trust law was still being taught. The model that arose among law school professors in the late 70s that downplayed the destructiveness of monopolies and to a lesser extent oligopolies has permeated my profession and the judiciary, and probably the political ranks. It is time for another long term change of heart.

I have many positive admiring comments for the new President. That he has TR's grasp of the poison of oligopoly leading to oligarchy is not one of them.

Posted by: mark_in_austin | April 25, 2009 10:44 AM | Report abuse

The cause of the crisis and the solutions to fix it our already spelled out in the book How America Can Escape the New Great Depression.

The cause is a combination of faulty credit ratings colliding with too much leverage. The only real solution to get out of the current debt induced deflationary depression the country is in is to print money and restore access to credit.

I strongly suggest that Speaker Pelosi gets a copy of this book and reads it. She can find the book and more insights at the economic blog:

www.escapethenewgreatdepression.com

We don't need months and months of investigation. We need action.

Posted by: Hailmaryyy | April 25, 2009 11:02 AM | Report abuse

Yes. We definitely need a Commission and/or Congressional hearings held under oath. The scope of the investigation should not be limited to failures in financial systems. The scope must include a broad, systemic probe of contributing factors.

One enormous factor often overlooked is the practice of companies offshoring millions of American jobs and American jobs replaced by H1-B visa holders here in the U.S. The current tax policies incent and reward such practices. No one has explored the full economic impact of such policies and the potential for significant risk in the future. Many companies that are not in economic distress are laying off highly-skilled and highly-educated Americans -- not because of the recession -- but for the sole purpose of exploiting the combination of 5% tax on overseas profits and cheap labor. The recession is a convenient smoke screen. The information technology industry, in particular, should be vigorously probed. The conventional wisdom is that offshored jobs are low-paid, low-skilled. To the contrary, not only are engineering, computer science and other high-tech jobs moving offshore, but sensitive data and control of core computing infrastructure (networks, applications, sensitive data) of virtually every American industry are also now in the hands of foreign and potentially unstable developing countries.

Economic and national security issues go hand-in-hand. What happens to financial markets and the economy in the event that offshored computerized core operations of banks, utilities and even government entities are suddenly denied or disrupted (for whatever man-made or natural disaster)? These are unchartered waters. The potential for disasterous results would make Wall Street look like boy scouts.

Witnesses should include, among others,experts in higher education, cyber terrorism/crimes, the IT companies that are offshoring, companies that have outsourced their computing operations to IT companies (and then offshored), and investigative journalists in the IT trade press. Only when the scope and truth is known will Congress be able to act to avoid further economic catastrophe.

Posted by: virginian7 | April 25, 2009 1:03 PM | Report abuse

What drove the explosion in derivatives? Was it mostly investor demand for mortgage backed bonds? Was there a role, as is sometimes claimed, that HUD/Fannie/Freddie standards played or where they followers rather than leaders in accepting lax lending standards? Did the CRA law have any effectr? Did these agencies at any time support the worst of the subprime lending standards (no dwn payment, neg amort, etc) or was that something that wall street cooked up on its own? If they did cook them up on their own, why?


Is it true that Angelo Mozilo at Countrywide strong armed Fannie to start buying up their riskiest loans?

What kind of pressures did analysts at the credit ratings agencies get from their bosses to value MBS as triple A? Did they feel that these were the proper ratings for these instruments? What pressures were the management feeling from their clients asking the bonds to be rated?

What was Cassano at AIG thinking? Were the models bad? Did they assume too much that house prices would only go up? Were the models mostly accurate but the catastrophic possibilities just ignored since they were considered a very low probability? Was there any concern for how much capital they had to back all these contracts or did they just not worry about it since there weren't strong regulations/regulators?

What did the CEOs of major banks put first, the interest of shareholders or meeting goals that would make them large bonuses? How much of what was going on (the complexities of the instruments) did these CEOs actually even understand? Did an environment of trying to meet numbers create an atmosphere where cooking the books was encouraged or at least more likely to happen?

Posted by: einniv | April 25, 2009 3:08 PM | Report abuse

Mr. Johnson,

Strong showing on Moyers last night -- please keep up the fight and rest assured there are a great many of us who admire your courage, honesty, and dedication here.

We need sweeping financial reform. The repeal of Gramm-Leach / re-instating Glass Steagal is a must -- possibly even using the utility commercial baking model that Stiglitz advocated for on Tuesday, before the JEC. Regrettably, hearings are probably necessary to get Congress to move. They are in the tank for Wall St. at present as you well know, and the mild chirpings of discontent in the public are neither informed enough nor loud enough yet to get traction here.

And with all due respect to Ms. Warren, the man for the job is Spitzer. Brings a little personal baggage with him for sure, but he's your 2009 Pecora. Whip smart, and fiercely determined when he sets his mind to something. The US public likes a redemption story anyway, right? Ok maybe we go with Warren on the Senate floor and keep Spitz in a war-room somewhere directing traffic and building the case.

Posted by: jchetnik | April 25, 2009 8:24 PM | Report abuse

Thank you, Simon, for this blog, your Atlantic magazine article, and your appearance on the April 24th Bill Moyer's Journal. Your clear, concise and complete explanations about the financial crisis can be understood by many people because you share your intelligence and knowledge knowing that most of us, including me, are not versed in the terminology and often difficult language of economics and financial matters.
I think Elizabeth Warren could be an excellent choice as the chief legal counsel for the hearings. Does she possess the prosecutorial experience and ability to manage the hearings? Eliot Spitzer may also be an excellent choice, despite his "baggage," which has nothing to do with his ability to prosecute such hearings. And, he certainly has experience conducting an investigation into Wall Street, and its attendant financial matters. Perhaps what writer jchetnik suggests would work well: Warren on the Senate floor, with Spitzer in a "war room" leading the investigations and directing traffic.

Posted by: brucees | April 26, 2009 12:24 AM | Report abuse

In theory this would be a great idea but none of the recent congressional committees have been anything more than shows to make Congress look like it’s doing something. Look at the 911 Commission, virtually nothing that came out of it was enacted. That’s the problem in this country today; everything is about show instead of substance.

Posted by: OutForJustice | April 26, 2009 1:18 AM | Report abuse

I think the commission should investigate 3 things :
1) With all this "no-one saw it coming" line that is now popular we need to remember that Eliot Spitzer complained http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html that Washington stopped the 50 States stopping the Credit Crunch bubble build up years ago. We need a full investigation email trails etc of the OCC, the FED and the White House regarding this.

Posted by: socrates2005 | April 26, 2009 8:22 AM | Report abuse

"dunking someone's head under water. (Done every day in pools across the nation by school kids adolescents and adults. It may get a whistle blown by teh lifeguard, but it's not torture!)"

It is when you tie them to a gurney and then dunk them in the pool.

Posted by: Frazil | April 26, 2009 8:28 AM | Report abuse

I think the commission should investigate 3 things :
2) About 10 years ago I had a conversation with a senior member of the Bilderberg group. He told me that at the last meeting the buzz word was “inter-dependence” – re Globalisation and they had decided that thanks to “inter-dependence” (he kept repeating “inter-dependence” like a druggie who’s just found out this week’s new work for Cocaine) the World will be both rich and stable in it’s wealth. As a systems designer “inter-dependence” means a “one falls, we all fall” unstable system – which is what has happened. Had these things been discussed and decided on in open debate in democratic legislatures around the world, the counter argument “one falls, we all fall”, would have got a decent hearing. With this being discussed and decided upon in secret, the centuries old checks and balances did not kick in. I think the commission needs to investigate the role of Bilderberg in this crisis – Bilderberg is stuffed with the World’s top bankers, media, politicians, industrialists, many of whom are in receipt of government aid.

Posted by: socrates2005 | April 26, 2009 8:37 AM | Report abuse

I think the commission should investigate 3 things :
3) Our present financial system was designed in pre-machine age 15th Century Venice. The cry of “Why do we have poverty amidst plenty ? from simple hungry folk pointing at fields, warehouses and shops full of goods with hungry people outside, has always been met by clever educated people pointing to dusty ledgers saying “we are poor because we do not have enough money in these books.”
Well maybe the books are actually wrong and are showing incorrect numbers ?
What have we actually ran out of in real things ? – Nothing ? – So if we are in reality rich but, in terms of numbers in accounts ledgers, poor then the books are wrong and the financial system we have is quite simply not fit for purpose in the modern World.
The complaint that the financial system only works - or seems to work - during bubbles and booms goes back hundreds of years.
I think the commission should investigate using modern financial systems such as NEFS – Net Export Financial Simulation. NEFS postulates that Wealth is real things and money is on the other side of the equation – it is not wealth, it is a claim on wealth – I don’t mean this in a hippie “Don’t worry just go dance in the free Sunshine” sort of way, I mean this in a dry technical accountancy way : If there is more wealth that claims on that wealth then, by using bookkeeping entries very similar to that used when a fixed asset is re-valued, more money can be created to the point where wealth and the claims on wealth are in sync. That way if we have wealth – real stuff, which we do, then we will be rich, if we run out of food and only we run out of something like that – we will be poor – we won’t be poor because of a shortage of numbers in a dusty ledger waiting for a housing bubble or Tulip bulb bubble or stock market bubble or something like that to rescue us. See www.worldnews.blog-city.com

Posted by: socrates2005 | April 26, 2009 9:00 AM | Report abuse

Please extend tolerance to the cynics above who post their despair. We've all just had it. I recall being in the position occasionally when I wanted a loan of humbling myself before a lender. Well, now we see where their wisdom has taken us. I don't want payback, but really, who do we think they are?
The Pecora hearings resulted in legislation and regulations that served the nation's economy well for 50 years. Yes, the world of finance has probably become more complex than it was in 1933, but the same-old, same-old deadly sin of greed is leading this crisis, as it did the depression.
It is probably a good guess that we can't throw the economic terrorists in Gitmo now that it is closing, but we can insist they don't continue to operate in the dark and take with impunity whatever they want.
It is naive to think that Congresses or Administrations consist only of the virtuous, hence it is the taxpayer's job (and that of the 4th estate) to insist these hearings be held and get down to who-done-it. Then we will prosecute 'em or throw 'em out and remain ever vigilant to prevent yet another round of this stuff wrapped up in some abused and misrepresented economic theory like "free market" (to the extent that means a market that isn't transparent and under scrutiny) doesn't happen again. When we get the playing field absolutely level (so "too big to fail" is a completely impossible thought) and the seven deadly sins are forever eliminated we can relax and try something like a "free market."

Posted by: eddgilleddgill | April 26, 2009 11:07 AM | Report abuse

Fraud needs to be addressed as well as regulation and the particular lethal mix of money and politics that we seem to always be involved with. Mr. Johnson is a breath of fresh air. I have been pestering everyone I know with links to "This American Life" (A Giant Pool of Money), interviews and articles. The crisis and it's causes aren't esoteric or difficult to understand. We, the people concerned with these issues, need to get more of our countrymen informed and, hopefully, involved. Someone got away with the donut and left the American people with the hole. This is ongoing. It is nice that the word "oligarcy" is finally appearing in the dialogue. It is good that we are starting to discuss the possibility that large financial institutions (too big to fail) are a threat to our democracy. Antitrust laws need to be expanded (if it walks like a duck...).

We've been let down by our watchdog institutions. We need to hold our governments feet to the fire while this is a matter of national interest. If people aren't outraged, they haven't been paying attention and we need to encourage them to pay attention. If forums such as this will get our government's attention, wonderful.

Thank you, Mr. Johnson, for opening the dialogue. Let's hope it leads somewhere.

Posted by: MrPK1 | April 26, 2009 1:09 PM | Report abuse

I've been doing my homework on this subject.

First, I have read Naomi Klein's book The Shock Doctrine. A lot of what she covered in the book can be seen in our present financial debacle. it's a good primer to understand what's happening - there's more than just money at stake here.

Second, I watched both episodes of Bill Moyer's interview with Perino and Johnson. I came away with the impression that Pecora never did get to the root cause of the great Depression - he just stirred up enough public bitterness and distaste for the banking sector that made Congress's job easier to create and pass legislation to curb the excesses of the financial giants. So I have serious doubt if a commission would succeed where he didn't. Another point made that indicates the depth of the problem was by 1938/9, Pecora himself acknowledge Wall Street was viewing the Great Depression as a minor setback.

Third, as for who is in a better position to tackle this issue, certainly both parties in Congress have dirty hands - that means they would be called upon to explain their part in legislation that disabled the protections enacted by Congress in the 1930's that are the root cause of the financial collapse today. And after Bu$h, with the assistance of the republicans controlling both House and Senate, trashed the DoJ, it wouldn't be prudent to seek their services either - something about Monica Goodling and hiring practices keeps haunting my memory, on top of wire taps and torture.

In the Bill Moyer's interview, Mr. Johnson suggested Elizabeth Warren would be an ideal candidate to head a commission, in that she has no political ties to either Wall Street or Congress, but she sure knows how to ask the right question that makes the interviewee squirm. However, Mr. Perino brought up the point there should be a rough prosecutor that knows how to get specific answers out of witnesses. Either way, an independent prosecutor with a staff knowledgeable in the law, accounting principles, banking regulation and so forth should be assembled with all the power necessary to dig deep and hard to get to the bottom of what went wrong so Congress and create legislation to bridle the financial sector and Wall Street.

Finally, it needs to be completely non-partisan - that means no active political voice. That means no think-tankers or political operatives, or lobbyist - no one associated with party/political policy or actions.

One last interesting point, banks that accepted TARP funds are eager to pay it back very quickly. That begs a question - if they needed the money in September of 2008 and are desperately trying to pay it back now, then why did they need the money in the first place? Is the crisis over? There seems to be something odd at work here that may indeed require a special prosecutor and a team of experts to look into what is really going on.

Posted by: MajorDomo1 | April 26, 2009 1:53 PM | Report abuse

It is wonderful to see "historians"
reminding us that "everything that's new, is
really old". This crisis, as Elizabeth
Warren of the COP, is a variant of the 30's depression crisis. According to Ms. Warren, the steps taken then, provided for 50 years of relative stability in banking and a credibility which is now lacking. It is appreciated that Mr. Simon and Mr. Perino added the forgotten chapter of the Pecora Hearings to the present day debate.
Framing the recently voted commission as a "911 like commission" may serve as a quick reference for the average American to accept and understand the reason for it's inception. However, based upon the reported methodology and success of the Pecora hearings; it may serve us better than the "911" style. After all, a surgeon is trained to realize that even though the lay public thinks of surgery as using "standard" techniques; each operation requires its own technique. When a technique has had great success there is little reason to change it. It seems to me that the efforts to promote the Pecora "technique" is laudable and needs a better public relations tool to motivate Congress. The outcome could then be comparable to 1933 and our future then comparable as well.

Posted by: thinkingquestioning | April 26, 2009 2:18 PM | Report abuse

What to investigate?

The Brooksley Born debacle. The fact that she gave up in frustration when no one would acknowledge that the unregulated credit default swaps could be a disaster for our country.

The timing of the bankruptcy laws to protect the credit card industry is suspicious as well.

The American taxpayer is being thrown under the bus. We supposedly elect officials to represent us - they get paid off by banking lobbies - end of story.

Posted by: finally1 | April 26, 2009 7:08 PM | Report abuse

Simon,

One theme you have discussed frequently is the problem that financial instututions are too large to fail that are essentially are blackmailing the US government for support throughout this crisis. It has occured to me that American consumers have the freedom to move deposits and utilize alternative financial institutions (i.e. regional banks or credit unions). I use a credit union that has held (and not sold) my home mortgage, has competative CD rates, and yesterday offered me a 6% new car loan. A popular revolt shifting business and assets from these too-powerful institutions certainly would not help with the current financial crisis. But I'd like to suggest that a longer term move away from these huge institutions on the part of consumers to more diverse smaller institutions (that are not too large to fail) may be a patriotic act.

Posted by: dacrandall | April 26, 2009 9:54 PM | Report abuse

I have read enough to understand in broad strokes what I believe has happened to lead us to this deplorable state of affairs in US finance, and sadly, what it's confirmed suspicions I've held for years in some cases, nearly 2 decades in others. I am deeply skeptical that nearly enough of our leadership in congress or elsewhere thoroughly understand how we've gotten here or where and how we must proceed to return our financial system to long term health and a situation in which this sort or magnitude of financial disaster is unlikely to occur again any time soon.

In reading about this financial crisis, I am constantly frustrated by information frequently described in the same sentence as relevant and confidential. As tedious and frustrating as commissions are, I believe an independent commission should be conducted on this fiscal crisis - OUTSIDE Congress. It's findings should serve as a guide in just the way the 9/11 Commissions findings have. The commission should have subpoena power over any share holders, directors or employees past and present of any firm that has received bail out funds, FDIC guarantees beyond those covering normal deposits, loan guarantees or any other form of extraordinary federal financial assistance. Subpoena power for this commission should also include all members of Congress and their staff past and present, as well as all federal department and regulatory agency employees, including the Federal Reserve.

I wish to offer my appreciation and admiration for Simon Johnson's clearheaded, and well-articulated view of this crisis - in the many venues in which it has appeared. I SUPPORT the view expressed by Johnson, Joseph Stiglitz and Thomas Hoenig at the JEC hearing last Tuesday (which though long, I highly recommend). It's clear that these large, wide ranging institutions need to be dismantled. I furthermore agee with Johnson that if necessary, the federal government should take them over and use federal antitrust law to break them up.

Finally I believe that to accomplish this, we need leadership in the Treasury Dept that is hard-headed and clear-eyed. I think Geithner has the potential to provide that, but I haven't seen him hit the mark yet. I've watched Obama's political career for nearly a dozen years and am a huge supporter, but his and Geithner's measured cautious approaches to this problem aren't what we need now.

It is critical for those of us who understand and appreciate Johnson's perspective to make it widely known and encourage our circles to speak out publicly and bring PRESSURE to bear wherever possible to move our government in this direction.

The longer we wait the worse for us all.

Posted by: kalliek | April 27, 2009 6:09 AM | Report abuse

Simon,

Although this is my first comment, I have been reading your blog and associated remarks for some time. You are performing an amazing public service. Thank you.

My hot button issue is derivatives and why they are not being regulated (nor is there any serious discussion about regulation) even at this late date. I'd like to undderstand why Senator Dorgan appears to be the only member of government pushing for this. From what he has said, he is STILL not getting much traction. Why? Does Summers have that much of a stranglehold on the thinking here? Personally, I thought the solution for unwinding the CDS market presented by Institutional Risk Analytics was spot on, and it would have saved US taxpayers billions of dollars if it had been done.

The other questions I have revolve around the refusal to move to a "bad bank" model and why this isn't being done and clearly won't be done as things stand today. The RTC helped save taxpayers billions of dollars. Why was such a solution dismissed here?

Posted by: ldruyan | April 27, 2009 6:25 PM | Report abuse

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