Economy: Federal Watchdog Can't Vouch For Administration Job Numbers
• "The government watchdog overseeing the federal stimulus program testified Thursday that he could not vouch for the Obama administration's recent claims that the money had saved or created 640,000 jobs. He suggested that the administration should have treated the number with more skepticism," the New York Times reports. "Earl E. Devaney, the chairman of the Recovery Accountability and Transparency Board, said... up to 10 percent of the recipients had not filed the required reports showing how many jobs they had created or saved."
• "As he readies an overhaul of the nation's financial regulatory system, House Financial Services Chairman Barney Frank," D-Mass., "is already looking at avenues to revise the package before it goes to the floor the week of Dec. 7," CongressDailyAM (subscription) reports. "At the top of the list is revisiting language his panel approved Thursday that would give sweeping powers to the GAO to audit the Federal Reserve."
Does the country risk a renewed financial crisis if the reform process bogs down? How much moral hazard has been created by the rescue, and how soon must it be diminished to avoid excessive risk-taking by financial companies? Has that excess begun already? Would it be a bad mistake for Obama to allow Congress to dominate the legislative process on financial reform, as he did with health care? Or has the financial system healed enough, and are banks and investors chastened enough, to allow a deliberate process for reform that takes longer but yields a more far-reaching law?
-- John Maggs, NationalJournal.com
Responded on September 14, 2009 12:39 PM
Gary Burtless, Chair in Economic Studies, Brookings Institution
“A crisis is a terrible thing to waste.” - Stanford economist Paul Romer (November 2004) Paul Romer’s pithy and somewhat cynical observation was not inspired by the recent financial crisis. It surely applies to that crisis, however. The fallout from last year’s financial meltdown was so widespread and severe that sensible people hoped poplar revulsion would provide an opportunity for legislators to overhaul financial regulation. Such an overhaul would be especially important in the United States, but reform is needed in other rich countries as well. Fundamental reform now seems increasingly less likely. Since last winter asset prices have partially recovered and the immediate threat to the financial system has declined. U.S. policymakers have moved on to other pressing concerns, including death panels and the threat posed by government insurance subsidies for illegal immigrants. The prospect for significant, rational reform of financial regulation is shrinking. Congress and the Administration may be about to waste ...
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“A crisis is a terrible thing to waste.” - Stanford economist Paul Romer (November 2004)
Paul Romer’s pithy and somewhat cynical observation was not inspired by the recent financial crisis. It surely applies to that crisis, however. The fallout from last year’s financial meltdown was so widespread and severe that sensible people hoped poplar revulsion would provide an opportunity for legislators to overhaul financial regulation. Such an overhaul would be especially important in the United States, but reform is needed in other rich countries as well. Fundamental reform now seems increasingly less likely.
Since last winter asset prices have partially recovered and the immediate threat to the financial system has declined. U.S. policymakers have moved on to other pressing concerns, including death panels and the threat posed by government insurance subsidies for illegal immigrants. The prospect for significant, rational reform of financial regulation is shrinking. Congress and the Administration may be about to waste a truly horrendous crisis.
The unprecedented actions of the Federal Reserve, U.S. Treasury, and overseas central banks have brought the developed world’s financial system back from the precipice. The weakest financial institutions have disappeared, merged, been propped up, or been taken over by the government. Stronger risk-taking institutions have scaled back leverage. These developments reduce the immediate risk of another meltdown. It is less clear whether private institutions have been frightened enough to reform their risky old behavior. Many observers, including me, are skeptical that memories of the 2008 catastrophe will exercise a restraining influence on traders and financial managers in, say, 2015. Unless the rules of the financial game are changed by government policymakers, private decision-makers are likely to resume the same bad behavior that gave us last year’s crisis.
I am an economist, not a political insider. I have no idea how Congress and the Administration could make better progress toward reforming the nation’s financial regulatory rules and institutions. I can only look at the meager progress made thus far and agree with Paul Romer, another economist: “A crisis is a terrible thing to waste.”
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Responded on September 14, 2009 12:10 PM
Peter Wallison, Chair, Financial Policy Studies, American Enterprise Institute
It’s important to recognize that the US financial crisis is sui generis, and did not arise from a defect in our financial system, let alone the capitalist system. It was caused by a vast number of subprime and other nonprime mortgages—25 million with an aggregate value of about $4.5 trillion—that are defaulting at unprecedented rates. This is almost 50% of all outstanding mortgages in the US. Many other developed countries had housing bubbles, but have not been afflicted by the same number of defaults as their housing bubbles deflated. That’s why the US economy, uncharacteristically, may be recovering more slowly from the recession than the countries in Europe. The unprecedented number of weak mortgages on the balance sheets of banks and others today is the result of government policies that attempted to boost home ownership by requiring Fannie Mae and Freddie Mac—and the banks themselves—to meet affordable housing and other government established quotas. Home ownership did increase, but so did the number of loans that could n...
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It’s important to recognize that the US financial crisis is sui generis, and did not arise from a defect in our financial system, let alone the capitalist system. It was caused by a vast number of subprime and other nonprime mortgages—25 million with an aggregate value of about $4.5 trillion—that are defaulting at unprecedented rates. This is almost 50% of all outstanding mortgages in the US. Many other developed countries had housing bubbles, but have not been afflicted by the same number of defaults as their housing bubbles deflated. That’s why the US economy, uncharacteristically, may be recovering more slowly from the recession than the countries in Europe.
The unprecedented number of weak mortgages on the balance sheets of banks and others today is the result of government policies that attempted to boost home ownership by requiring Fannie Mae and Freddie Mac—and the banks themselves—to meet affordable housing and other government established quotas. Home ownership did increase, but so did the number of loans that could not be paid back when the housing bubble stopped growing.
Under these circumstances, the administration’s proposals for financial regulatory “reform” would do nothing to prevent another crisis. Like all regulation, they will simply impose new costs, and suppress competition and innovation. The lesson we should take from this financial crisis is not that new and more far-reaching regulation of the financial system is necessary, but that government should stay out of the business of directing capital flows to specific favored purposes. If that standard is adopted, mortgage underwriting will improve and mortgage portfolios will return to health. There will be bubbles, to be sure—human nature breeds irrational exuberance—but their deflation, as in the past, will not cause financial crises.
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