I was disappointed by the four-man dissent released back in December by the right-of-center members of the Financial Crisis Inquiry Commission. I was impressed and pleased by the just-released dissenting statement signed by commissioners Keith Hennessey, Douglas Holtz-Eakin, and Vice Chairman Bill Thomas, which offers an impressively balanced picture of the various forces that contributed to the crisis that goes beyond political posturing and point-scoring. The following is drawn from a WSJ op-ed that summarizes their arguments:
We agree with our colleagues that individuals across the financial sector pursued their self-interest first, sometimes to the detriment of borrowers, investors, taxpayers and even their own firms. We also agree that the mountain of government programs supporting the housing market produced distorted investment incentives, and that the government’s implicit support of Fannie Mae and Freddie Mac was a ticking time bomb.
But it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.
As for the main report, it does seem to suggest that better regulation would have done the trick. As
The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission. As Sewell Chan reports in the New York Times,
The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission.
Indeed. And as Charles Calomiris has argued, Dodd-Frank is extremely unlikely to prevent another financial crisis:
There is virtually no discussion in either the Dodd-Frank bill or the Basel Committee admitting the problem of risk measurement or proposing a solution for it. Slightly higher capital requirements are being imposed and more are being discussed, but nothing is being done to fix the regulatory system’s failure to measure risk and require capital accordingly. Nothing is being done to address the incentives of banks or rating agencies to hide risk; the two methods to measure risk (asking banks and rating agencies for opinions) have proven to be unreliable, but regulation still relies on them. So long as banks can vary risk as they please, small increases in required capital will be easily undone in their effects simply by goosing up risk invisibly.
With respect to TBTF, Dodd-Frank makes the problem much worse by institutionalizing a mechanism whereby the government, through the FDIC, can bail out any debt they choose. It is a profound irony that Chairman Ben Bernanke and Secretary Timothy Geithner argued for the new resolution authority as a means of imposing “haircuts” on uninsured creditors; they claimed that without a resolution authority haircuts would not be possible. But the new resolution authority permits the FDIC to impose zero haircuts, and that path of least political resistance will likely be chosen by government officials charged with implementing the new law.
Calomiris goes on to offer an alternative approach that, to my untrained eye, seems more likely to succeed. We’ll see where this conversation goes next.