Frank Talk. In 1933, the House Banking Committee began a remarkable series of hearings on the causes of the Great Crash. The investigations, which became known as the Pecora hearings after chief committee counsel Ferdinand Pecora, laid bare the conflicts of interest and insider scams that pumped up the stock market bubble of the late 1920s. The Pecora hearings also laid the groundwork for the great financial reforms of the New Deal, which in turn bequeathed two generations of prosperity, thanks to a regulatory system that invited economic dynamism with rules that prevented abuses.
History has now thrust Barney Frank into the role of the next Pecora. Rep. Frank (D-Mass.), a smart progressive, chairs the House Financial Services Committee, the current name for the Banking Committee. But judging by Wednesday's kickoff hearing in a series of inquiries into the deepening financial mess, Rep. Frank faces a tougher challenge than Pecora did.
This is because the Bush administration and most on Wall Street are still in deep denial of what is occurring in credit markets. The administration testimony suggested that the deniers dearly want to believe that the meltdown in sub-prime mortgages is a one-off, that the economy dodged a bullet, and hence only the most modest government response is required.
This kind of denial has superficial appeal because, unlike in 1933 when Pecora began his work, we haven't yet had a full-blown crash. But if the government's only response is to wait for the Fed to bail things out and to do a little tweaking of abuses around the edges, that crash will come.
As Frank put it, "I am not pleased that so many of us were surprised at how the sub-prime crisis spilled over into broader financial markets. I don't want us to be surprised again."
"We have had a test case," he observed, "and in the mortgage market, sensible regulation worked better than its absence."
"The question before us," he added speaking more broadly, "is whether there may be a systemic problem here. Has innovation so outstripped financial regulation that we need to catch up, without diminishing the advantages?"
Amen.
Fox, Chickens. Testifying for the administration, Treasury Undersecretary for Domestic Finance Robert K Steele assured the committee that "while certain sectors like housing are undergoing a transition, overall economic fundamentals remain solid." This column will continue to track Hoover-like statements in coming days. As Frank acidly observed in his opening remarks, "We have tried to talk investors out of being nervous. I don't think that works very well."
Steel also told the committee that the President's Working Group on Financial Markets, chaired by Treasury Secretary Hank Paulson was on the case. This is a real hoot, since connoisseurs of this crisis will recall that the committee was set up precisely to beat the drums for more deregulation. Paulson's committee is about the last place in Washington to look for sensible policy. One of the few nice bi-products of this crisis is that you don't hear very many people these days warning that regulation is killing capital markets.
Well, Actually … In fact, while the Financial Services Committee was holding its hearing, over at the House Ways and Means Committee, which is considering legislation to tax the windfall gains of hedge funds executives as ordinary income rather than capital gains, hedge fund lobbyists, such as Bruce Rosenblum of the Carlyle Group, were repeating stale warnings that fair taxation would drive capital investment offshore -- to say London where hedge funds are booming and are more tightly regulated than here. "Complete poppycock," replied witness Leo Hindery, Jr., a managing partner at a private equity firm InterMedia (and an anomalous Wallstreeter who is raising money for John Edwards.) Hindery added, "Congress, starting with this committee, needs to tax money-management income, what we call carried interest, as what it is, which is plain old ordinary income."
Amen again.
