Pethokoukis Blaming Congress
by Mike Kimel
Pethokoukis Blaming Congress
From his perch at Reuters, James Pethokoukis writes (and this is his title) about 4 ways Congress caused the financial crisis. He quotes from a paper by Ross Levine. I have not read the Levine paper yet but the abstract does seem to indicate what Pethokoukis wrote. The abstract does not seem to indicate blame is placed with Congress, but rather that the regulatory agencies (which presumably includes Congress) should have seen the signs of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies.
Thus, I don’t know if Levine also blames Congress for the crisis or whether he would merely indicate (as many would) that Congress could have done something to stop it, but the abstract seems to indicate that .
In any case, Pethokoukis quotes 4 reasons this is Congress’ fault:
1. Congress did not prevent ratings agencies from behaving poorly
2. Congress did not prevent bankers from engaging in excessively risky CDS trades
3. When the SEC allowed investment banks to leverage up, Congress did not step in
4. Congress did not engage in enough oversight of Fannie and Freddie
If I understand Pethokoukis correctly, his view is that Congress caused the financial crisis by forcing private sector players to behave recklessly, which it did by not regulating them. Which seems odd to me. Particularly since, having read a lot of what Pethokoukis wrote over the years, I cannot believe he would have advocated having Congress do more regulating of ratings agencies, banks, investment banks, or even Fannie and Freddie. (Which would almost imply Pethokoukis is in favor of financial crises of this magnitude, wouldn’t it?) And he certainly wouldn’t have credited Congress had Congress engaged in more regulating and things turned out well. (Who would?)
As I said – this is seems very odd to me.
Not odd at all. When your into blaming governemt, which congress is the stand in for, then you blame congress. It’s just that simple (as in minded).
“If I understand Pethokoukis correctly, his view is that Congress caused the financial crisis by forcing private sector players to behave recklessly, which it did by not regulating them. Which seems odd to me.”
I think it is more like the traditional Spanish view of the chaperone. The idea, normally left unstated, is that men and women, left to themselves, will go at it like bunnies. That is not their fault, it is just how it is. And if they are left unchaperoned, it is the chaperone’s fault if anything happens.
Now, that view is at odds with the idea that chaperones are unnecessary, because the Invisible Hand will make everything work out all right in the end. In fact, chaperones may be harmful, because they inhibit the workings of the Invisible Hand. 😉
When the Invisible Hand administers a corrective slap does it leave a mark?
There are a number of regulatory agencies beyond the SEC, most of which are led by political appointees. The SEC, mostly charged with overseeing stock-related reporting issues among stock-issuing firms, is not at the heart of the recent regulatory failure. The Senate may be called upon to confirm appointees who rul regulatory agencies, but most are selected by and many serve at the pleasure of the president. It is so, so unfashionable to blame Bush for efforts to undermine the good function of government, isn’t it? Who would be so crass? But the whole unitary executive thing was, after all, a favorite idea among the Bushies and implies that he, the decider, is responsible for conditions created in and by government duing his watch. In addition to the unfashionability of pointing out the nakedness of Emperor Shrub, to lay blame with the White House would suggest that Obama should take a stronger hand with regulators and so with the markets that they regulate. Somehow, the whole “serious-minded” crowd goes all unserious when it comes to letting this particular president preside. Kinda like with Clinton. Come to think of it, kinda like with Bush the Elder, too.
“Liberal media” my left whatsit.
It wasn’t until we got a conservative media (sic, Latin scholars ;)) that most people began to believe that the media was liberal. That’s because that’s what the media told them. 😉
This is yet another attempt by a republican sympathizer to blame government for this catastrophie. But maybe, just maybe, he is right. After all it from 1994-2006 both houses of congress was controlled by the republican party.
A political party that wants to deregulate, decentralize and do what ever the hell it wants in a libertarian paradise is a party that simply can’t govern.
“And he certainly wouldn’t have credited Congress had Congress engaged in more regulating and things turned out well. (Who would?)”
Sadly, the world is full of just such issues. Prudence is no fun, but that isn’t it’s biggest problem. The benefits of prudence are often hard to see. Often, the best you can hope for is the object lesson of those who failed to exercise prudence. On the other hand, the long bomb, shoot-the-moon, bet-the-farm way of living can produce some spectacularly appealing results, while failures of the “go big” approach end up either disappearing from view or being bailed out our hired to run another hedge fund.
A whole bunch of cultural notions regarding looking before leaping, pennies saved, early-to-bed, never-a-borrower-nor-a-lender sorts of things aim at conveying wisdom about things for which evidence is not emotionally available. How often do you hear “Yippee!, didn’t go bankrupt again today” or “I drove all the way to work and back, and I lived!”? I can’t think of the last time. So all we have is Aesop’s tales to make us behave, while we have the whole upper tier of the finance sector to make us run wild.
Kharris,
One more lost piece of advice: never invest in the market that which you can not afford to lose.
Actually, it wasn’t lost, it was replaced with: the market is as safe as a bank. This was not true early on, but that was fixed and now both seem equally as schizoid.
***
1. Congress did not prevent ratings agencies from behaving poorly
2. Congress did not prevent bankers from engaging in excessively risky CDS trades
3. When the SEC allowed investment banks to leverage up, Congress did not step in
4. Congress did not engage in enough oversight of Fannie and Freddie
***
The United Nations, the FX markets, the Boy Scouts of America and the Klingons also failed to act. Does that make them jointly and severally liable for the disaster?
Seems to me that Congress was lied to extensively and repeatedly by the financial community. That surely is the primary cause of Congress’ failure to act. It is now Congress’ job to try to make sure that the problems the financial wizards created don’t occur again. … And also to incarcerate any liars who can be shown to have knowingly misrepresented things to Congress.
My prediction is that Congress will do neither although there seems to be just enough public outrage that there is a possibility that justice may eventually be served.
Congress didn;t cause anyone to do anything.
On the other hand (as an economist would say) Congress does have a deep and wide committee structure supported by massive (and expensive) staff resources, and the mission of many of those committees is oversight.
(I used to wonder why 535 members needed so many office buildings.)
Seems here oversight-after-the-fact is not so effective.
VTC,
I mostly agree, but I would point out that Wall Street gave Members of Congress far more money than they gave the Boy Scouts. Doesn’t mean Congress is blameless, but rather that any blame that falls on Congress should also fall on top of Wall Street, in addition to the blame that Wall Street must suffer on its own.
Like suffering blame matters to them…
***I used to wonder why 535 members needed so many office buildings***
I’m having a little trouble finding confirmation on the internet, but my sometimes faulty memory tells me that when Bernie Sanders was the Congressman from Vermont he had a staff of a dozen or so in Burlington and about the same in Washington. Why? Constituent service mostly is my understanding. Your passport application has vanished into a black hole? The IRS has you confused with your nerdowell cousin and is attaching your wages? The SSA has decided that you are dead and has stopped sending your Social Security check? You call your congressman (or senator).
Since Sanders has a reputation for being a very good administrator and providing flawless constituent service, I reckon all those folks really must be necessary.
On the third hand, Congress loved the housing boom in DC, in their home districts and states, and loved the good GDP and employment numbers that came from a boom economy.
Why wouldn’t all elected lawmakers become Libertarians under a scenario like that?
VT:
The larger staffs are committee staff, Ways and Means if I remember correctly has hundreds of staffers, mostly lawyers.
Sanders’ personal staff is is his offices, committee staff are in the committee offices dedicated to doing committee work only.
Well, not that Congress is not in the back pockets of large campaign contributors or anything. There is plenty to blame on the crooks in congress, and many of them are just that unethical crooks on both sides of the aisles.
Why not try recasting this argument?
Congress (the politicians) and the regulators (the bureaucrats) were entirely crap at regulating the financial sector.
Thus the argument in favour of giving the politicians and the bureaucrats more power to regulate the financial sector is what?
We do, after all, know that they’re crap at it…..
Congress can only make new laws or amend existing laws. It cannot enforce existing laws. That’s the executive branch’s job. Thus, Congress did not have any power under the Constitution to accomplish any of the four things that Pethokoukis said it didn’t do. Simply put, Congress didn’t do those four things because it couldn’t.
Might as well blame pigs for not flying.
Tim,
I have to disagree with that point of view. It’s not that I think that the politicians and their appointed bureaucrats are not crap. They are, but they are not crap at what they do. What they do, however, is not what we expect and hope for them to do, like regulating and over seeing. They are good at describing all the efforts that they are making. They are good at assuring the voters that they will be well represented in the Congress. They are especially good at arguing with one another so as to give the appearence of supporting distinctively different ideologies. They are crap in that it’s all bull shit. Rememeber the game is good cop/ bad cop and let’s change roles from time to time. They are very good at representing and protecting the financial interests of their backers. That’s not you and me. They are also pretty good at convincing the general public that they are different from one another and that they represent real political and social ideologies. That’s the crap part of the game. They represent financial interests of a small sector of the public. Don’t sell crap short. It’s value is always on the up swing.
There are some things Congress did do.
1) Since 1995, certain members did push for F&F to get more and more into subprime.
2) During the growth of the housing bubble, they kept voting up the conforming limits on GSE loans. It rapidly went up to something like $450K, adding monetary fuel to the fire. Now they have something like a $750K limit on FHA loans. Probably so they can unload their Georgetown homes.
Then, the Fed Chairman has to testify before Congress on a regular basis. When have you ever heard Congress complain that interest rates are too low?
The Fed had regulatory authority over consumer loans, so why didn’t Congress ever take the Fed to task over enforcing something about teaser loans, NINJA loans, predatory lending, etc… when it would have made a difference. Don’t tell me they didn’t have some idea this was going on. I saw and heard plenty of advertising for that crap.
And when has Congress ever been shy about giving their opinion on anything, whether there was legislation to be passed or not?
So I don’t give them a free pass on this.
Embattled Rep. Charles Rangel (D-N.Y.) said at a press conference this morning that he would pay back taxes he owes on rental income from a resort villa he owns in the Dominican Republic. Rangel admitted to making “irresponsible” mistakes and has asked the House ethics committee to investigate his actions, though he said he believes he has done nothing “morally wrong……
The Senator, a Democrat from Connecticut and Chairman of the Senate Banking Committee which regulates mortgage lending, was named in an article by Julie Hirschfeld Davis of the Associated Press and earlier by Conde Nast Portfolio magazine, as one of two senators ‘ the other being Senator Kent Conrad (D ‘ ND) ‘ as having received preferential treatment from Countrywide CEO Angelo Mozilo in obtaining mortgage loans. Dodd had earlier this year called Countrywide’s lending practices “abusive.”….
Because they take big gifts from those they regulate.
Congress did not vote to increase lending limits for the GSEs. The GSEs use the prior year’s median price as a reference for the next year’s limit. No legislation is involved. Even after the crash, when the GSE’s suspended the median price rule, which would have lowered the limit in 2009, there was no legislation involved. I believe legislation was needed to allow for lending in the jumbo market, but I’ not even certain about that.
I don’t believe anybody here wants to give Congress a pass. The problem is that Petrock guy is simply getting his argument wrong. That’s worse than worthless, because it spreads misunderstanding, so we spend time trying to fix problems that don’t exist rather than fixing the real ones. There is also the question of Petrock’s motives, since his effort to direct attiention and blame from elsewhere to Congress fits in with his known bias.
Then I guess those AP news reports I read in the first half of the decade were wrong. Congress was reported to be concerned that the GSE loan limits were not growing as fast as CA real estate which was growing much faster than the national median housing price. I didn’t question it because the limits went from about 200k to about 450K in a few short years, but I guess crappy reporting is another thing to worry about.
that’s why they call it an oversight.
Tim
I haven’t followed the argument that closely, but it seems to me you are making the same mistake as pethokoukis. just because the congress does a bad job does not mean that we can do without the congress, or get by with “no-job.”
anymore i don’t know how to go about electing honest and competent congressmen and presidents, but that is still the problem. we need a better congress not a no-congress.