Friday, October 10, 2008

We don't need no stinkin' commission!

Sadly, it appears that once elected President, Senator Obama will not have any use for a commission to examine what led to the financial crisis. He has publicly stated:
Just today, Senator McCain offered up the oldest Washington stunt in the book you pass the buck to a commission to study the problem. But here's the thing this isn't 9/11. We know how we got into this mess. What we need now is leadership that gets us out. I'll provide it, John McCain won't, and that's the choice for the American people in this election.
There you have it. McCain's for it, so I'm against it. I can't admit that the other guy came up with a good idea first, so I'll attack the idea.

Here's what Freakanomics blogger, and business school (and law school) professor Ian Ayres has to say to Senator Obama:
It’s one thing to criticize McCain for inaction, but I disagree with Obama’s claim that we know how we got into this mess. In fact, if pushed, I would say I knew a lot more about the causes of 9/11 than I do about the causes of the mortgage crisis...

But to my mind, there are still dozens of important unanswered questions.

How much of the crisis was caused by subprime borrowers who made mistakes by borrowing (i.e., would not have borrowed if they had better information)


Was this a failure of Super Crunching? Was it a failure of corporate governance (in that the managers of the buying firms had incentives to unprofitably grow their empires)? Was the failure caused by originator fraud (or the moral hazard of substituting bad-doc loans for what historically had been high-quality loan pools)?

I think it is probably some mixture of all three — with poor corporate-governance incentives particularly explaining the failure of the rating agencies to start downgrading the debt earlier.

Knowing the answers to these causal questions is important if we are going to craft useful policy responses.
Study the causes, and THEN regulate (or more likely re-regulate). What a novel idea. Usually, the Democrats complain about Republicans' contempt for reflection and learning. We can safely say that such disdain is bi-partisan.

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