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Congress Oversight Committee hearings on financial crisis

 
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Leonie Humphreys



Joined: 23 Sep 2008
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Location: West Dorset, UK

PostPosted: Sun Nov 02, 2008 1:21 pm    Post subject: Congress Oversight Committee hearings on financial crisis Reply with quote

The US Congress Committee on Oversight and Government Reform is holding hearings regarding the current financial crisis (http://oversight.house.gov/hearings.asp)

The hearings provide alarming and fascinating information on the outright greed of the CEO’s of the collapsed banks and other companies as well as the failures of credit rating agencies and the regulatory bodies.


As Henry Waxman (Chairman, Committee on Oversight and Government Reform) says ‘Each of these case studies is different. But they share common themes. In each case, corporate excess and greed enriched company executives at enormous cost to shareholders and our economy. And in each case, these abuses could have been prevented if federal regulators had paid more attention and intervened with responsible regulations.’

On Lehman's he comments ‘What's fundamentally unfair about the collapse of Lehman is its impact on the economy and taxpayers. Mr. Fuld will do fine. He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis.’

Concerning the Credit Rating Agencies Waxman said ‘In their testimony today, the CEOs of Standard and Poor's, Moody's, and Fitch will tell us that "virtually no one ... anticipated what is occurring." But the documents the Committee obtained tell a different story.’ …… ‘The story of the credit rating agencies is a story of colossal failure. The credit rating agencies occupy a special place in our financial markets. Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public. The result is that our entire financial system is now at risk.’

Waxman also points out: ‘Over and over again, ideology trumped governance. Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became: government regulation is wrong and the market is infallible.’

In his testimony concerning the Role of Federal Regulators, Christopher Cox (US Securities and Exchange Commission) had this to say: ‘... The economy has been through real estate boom and bust cycles before. What amplified this crisis, and made it far more virulent and globally contagious, was the parallel market in credit derivatives. If the original cause of the mortgage crisis was too-easy credit and bad lending, the fuel for what has become a global credit crisis was credit default swaps.

Credit default swaps resemble insurance contracts on bonds and other assets that are meant to pay off if those assets default. Lenders who did not sell all of the loans they originated were able to buy relatively inexpensive protection against credit risks through credit default swaps. That further encouraged unsound lending practices and encouraged greater risk-taking. At the same time, credit default swaps became a way for banks, financial firms, hedge funds, and even Fannie Mae and Freddie Mac to hedge their risk − but in the process, to expose themselves to new risk from their often unknown counterparties.

By multiplying the risk from the failure of bad mortgages by orders of magnitude, credit default swaps ensured that when the housing market collapsed the effects would be felt throughout the financial system. ...

... The unprecedented $85 billion government rescue of AIG, necessitated in substantial part by others' exposure to risk on its credit default swaps, is but one of several recent alarms. As significant as AIG's $440 billion in credit default swaps were, they represented only 0.8% of the $55 trillion in credit default swap exposure outstanding. [The] amount of unregulated financial transactions is more than the GDP of every nation on earth, combined.'


Dr Alan Greenspan’s testimony concerning the Role of Federal Regulators begins ‘We are in the midst of a once-in-a century credit tsunami.’ He suggests various regulatory changes and he ends concluding that ‘This crisis will pass, and America will reemerge with a far sounder financial system.’ He also suggests ‘We should seek ways to reestablish a more sustainable subprime mortgage market.’

Do you share Greenspan's confidence in the long term even with regulatory changes? And how could the so-called ‘subprime’ mortgage market become more sustainable? These and many other questions need to be answered (see also discussions under the topic: THE CREDIT CRUNCH).

The hearings include the following:

Roles and Responsibilities of Federal Regulators
Credit Rating Agencies and the Financial Crisis
Hearing to examine the regulatory mistakes and financial excesses that led to government bailout of AIG
Hearing to examine the regulatory mistakes and financial excesses that led to the bankruptcy filing by Lehman Brothers
Financial collapse of Fannie Mae and Freddie Mac, their takeover by the federal government, and their role in the ongoing financial crisis (hearing on 20th November)


Further details and reports can be found at:
http://oversight.house.gov/hearings.asp

Your comments and observations are welcome.
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Hal Friedman-Bklyn guy



Joined: 29 Sep 2008
Posts: 7
Location: New York City, USA

PostPosted: Mon Nov 10, 2008 10:43 pm    Post subject: Oversight Committee Hearings Reply with quote

My commentary will focus briefly on the political-ideological basis for the financial collapse, which, hopefully, will be brought out in these hearings.

I believe this collapse occurred not due primarily to purely economic factors or because of "greed and stupidity" though undoubtedly these played key roles, but due to the the political climate created by some followers of American conservatism.

There are three pillars of post-war American conservatism: Social conservatism ranging from Burkean traditionalists to the fundamentalist Christian Right; anti-communism, now replaced by the Neoconservative war on terror; and a governing philosophy summarized by the terms "small government-low taxes," supported by classic "country-club" corporate Republicans.

It is this latter pillar which is implicated most in the collapse. Its harbinger was Ronald Reagan who campaigned successfully for President on the paltform of "government is not the solution to our problems , it IS the problem!" While it could be said that the US government had grown too much and was suffering from bureaucratic sclerosis and inefficiency, Reagan took a meat axe instead of a scalpel and cut away many useful governmental operations. The most damage he did was in inflaming the historically-based popular American suspicion of large central government and the welfare state into a mania of distrust and disbelief that the government could do anything right.

The main beneficiaries of this attitude were the wealthy and their corporate managers who not only paid far less taxes but also had nearly a free hand in any activity they chose to undertake. The Clinton Presidency was unable to change this conservative ideological dominance and even added to its power by breaking down walls between consumer deposit banks, insurance companies and investment banks, walls which did limit flexibility but which also maintained stability such that a Great Depression had not reoccurred in sixty years.

The Bush Administration pared back regulations to a level not seen since before the New Deal of the 1930's and appointed corporate types to run what regulatory agencies were left, in effect, letting the patients run the asylum. The result was an exhilarating chase for maximum profits by American business all over the globe, fantastic financial inventions like collaterized debt obligations and chimerical insurance products like credit-default swaps. This all led to umimaginably large paychecks for the favored few CEOs and hedge fund managers, largely tax-free due to the Bush tax cuts and also to the placing of heavy burdens of debt on an increasingly fragile economy with the collapse being a near inevitability.

The election of Barack Obama should portend the end of this modern-day laissez-faire economic policy and a return to a more realistic view of government regulation and involvement with the economy and more responsible corporate behavior. It is my hope that the Oversight Committee will not just focus on the bad acts of a few irresponsible corporate cretins but bring to light and expose that conservative philosophy which enabled them.

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