THE BUSH ADMINISTRATION'S DEEP DENIAL. 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?”


(Check out the rest of my commentary for the day here.)

--Robert Kuttner

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