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.

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.