The Waxman Committee held a hearing titled, “The Financial Crisis and the Role of Federal Regulators” at 10:00 a.m. on Thursday, October 23, 2008, in 2154 Rayburn House Office Building. The hearing examined the roles and responsibilities of federal regulators in the current financial crisis. This is the fourth hearing into the ongoing financial crisis. Testifying were Alan Greenspan, former Fed Chair, John Snow, the former secretary of the Treasury, and Christopher Cox, the current chair of SEC.
This hearing was the first concerning with the role of the public sector. Based upon what legislators learned from previous hearings, the hearing reflected growing suspicion of the government’s role in the crisis. Specifically, if the government had intervened earlier, the crisis would likely be prevented. This led to today's review of actions and inaction before the crisis.
Committee Chairman Henry Waxman admitted that there has been a de-regulatory atmosphere throughout the financial system, which led to handing over almost all regulatory responsibility to the supposedly infallible market. All branches, including the Congress, are responsible for the crisis. The Committee summoned the three testifiers to learn about what in the past had not been done correctly, and what the government should do to fix the flaws of the system.
The testimony began with Mr. Greenspan. He outlined the sources of the crisis and government policies that could best address the turmoil going forward. He discussed what he has learned during the past year. He said the most important factor that would lead to the end of this crisis is the stabilization of home prices, because this would increase the values of mortgage-backed security collateral. But, unfortunately, he sees this as “many months in the future.” Between now and then, to avoid severe retrenchment, financial intermediaries should get rid of insolvent assets. He believes that 700 billion dollars would be adequate.
He also said that the failure of the self-interest of lending institutions to protect shareholders’ equity left him in a “state of shocked disbelief.” He emphasized that those who issued securitized products should be restrained from doing so in the future. He also suggested changes in regulations, particularly with respect to fraud, settlement, and securitization. He finnaly suggested that regulators eek to reestablish a more sustainable subprime mortgage market, as home and small business owners depend upon these.
The second to testify was Mr. Cox. He said the lesson of the crisis is that a strong SEC is needed, which is “unique in its arm’s-length independence from the institutions and persons it regulates.”
He agreed with Mr. Greenspan that all of the activities that “made financial institutions and the broader economy seriously vulnerable to a decline in housing prices,” such as the securitization of bad loans, led to the crisis. He presented three lessons for legislators: first, eliminate the current regulatory gap in which there is no statutory regulator for investment bank holding companies; second, recognize each agency’s core competencies; and third, ensure that securities regulation and enforcement remain fiercely independent.
The last one to testify was Mr. Snow. He thought that policy makers need to avoid saying or doing anything that could decrease confidence, increase market volatility, or undermine ongoing efforts by those in responsible positions to address the situation.
GWU, BS, Economics, 2009
Tuesday, October 28, 2008
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