Monday, October 6, 2008

A Necessary Commission

A Call for a Commission on the Financial Crisis

Congress has now acted to staunch the bleeding, passing the financial bailout bill on Friday.

The question is, where do we go from here?

There are many different hypothesis on how we got into this mess (it's the government's fault, it's our fault, it's Wall Street's fault).

We need to sort them out.

One suggestion I have is to form a commission to study the causes and report back to Congress on them. In an ideal world, this would be done as an alternate to Congressional hearings, which will be created around the preferred explanation that will yield the politically correct policy answer. Realistically, Congress will need to hold hearings regardless to just show it's busy trying to protect the voting public. That's fine, but we still need a commission (note: Senator McCain has suggested the creation of one as well)

Why a Commission?

First, the issues involved in the meltdown and the causes are highly technical. Doing the job right will involve bringing together top experts in finance, law, housing markets, economics and other disciplines. Even were Congress to bring temporary staff on board, it could not replicate the expertise needed to do the job.

Next, the Commission's work will necessitate the pronouncement of some harsh truths. For instance, to do its job, the commission will need to say, in effect, that many people shouldn't be in the homes they have. There will no takers for that role among our elected officials (thanks mostly to us for shooting the messenger). The medicine will best come from those who won't face those homeowners in the next election.

What Should the Commission Do?

The Commission should, in essence, write the narrative. It should explain as best it can how we got here. For instance, that was the best thing the 9/11 Commission did. It provided a clear, well written account of WHAT HAPPENED. Having a similar narrative for the financial crisis would help educate the public, and make it easier to swallow the sort of medicine that will be necessary to get us through the next year or so.

What shouldn't the Commission Do?

This is perhaps the most important question.

I think the Commission should avoid making any recommendations. The reason for this is because there is the danger that the recommendations will drive the narrative. In order to make a recommendation look justified, Commission members and staff will lean towards an explanation that supports it. That will interfere with the creation of an unbiased hard look at what happened.

Further, the need to avoid strife (e.g., public dissenting) will force compromises. Members will need to hold their nose on certain recommendations to get others. They will then feel bound to support a compromised product after its completion. This will reduce the informed opinion available to Congress after the report is issued.

Once the report on "why" is out, Congress can hold hearings and invite individual Commissioners to comment on what should be done going forward. It can then fulfill its role of listening to the experts and making the needed legal changes.

For a dissenting view, see here. Notably, the main argument against one is that McCain suggested one. Obama needed to attack McCain, so he criticized the idea. As a result, if you're for McCain, a commission is a good idea. If you're for Obama, it's a bad one. If a commission isn't created politics, not the merits of the idea, will be why.


Patrick said...

I think there are two needs: The first is the obvious - an immediate need to stabilize the economy. The second need is to discover the root causes of how the economy went wrong and prevent a recurrence of those issues.

A Commission would make it easier to enact new regulations needed in the financial industry.

The People's Business said...

Patrick, I think you're correct.

At the very least, the new regulations will be better tailored to meet the situation.

I'm concerned that this crisis will give people an excuse to try to push their pet ideas in the guise of helping the situation, much like we saw when we passed the stimulus bill. Everyone's favorite item all of a sudden became "economic stimulus."

Now everyone's pet idea will become (somehow) "financial stabilization."