Bailout Oversight Panel Calls for More Regulation
Thursday, January 29, 2009
A congressional panel overseeing the government's financial bailout has concluded that the economic crisis could have been prevented with better regulation and called for a raft of proposals to overhaul government oversight of the financial sector.
"The current crisis should come as no surprise," the panel wrote in a draft of the report, which is scheduled to be released today. "The present regulatory system has failed to effectively manage risk, require sufficient transparency, and ensure fair dealings."
The group urged creating a regulator with the authority to oversee financial firms whose failure poses a risk to the overall financial system. The panel also called for further regulation of the mortgage industry, hedge funds and derivatives, as well as limits on excessive borrowing by financial institutions.
The recommendations came from the Congressional Oversight Panel for the Troubled Assets Relief Program -- the formal name of the $700 billion government bailout -- with the five members splitting on partisan lines. The three members appointed by Democratic lawmakers, including its chairman, Harvard Law School professor Elizabeth Warren, voted to approve the report, while the two Republicans voted against it, according to a spokesman for the panel.
The Republicans plan to release a separate dissenting report, which says that some of the majority's recommendations are "rife with moral hazard and the potential for unintended consequences" and that others might be "impossible to implement outside the walls of academia."
"Before embracing more government regulation as the only answer, such advocates should consider the many ways in which government regulation itself can be part of the problem," the Republican report said.
In the majority report, the panel attributes the faulty regulation to the success of programs put in place after the Great Depression. Before, the United States suffered a major economic crisis roughly every 15 to 20 years, as far back as the panic of 1792. But post-Depression regulations were so successful, the report concluded, soon "a financial crisis was seen as a ghost of the past."
"After fifty years without a financial crisis -- the longest such stretch in the nation's history -- financial firms and policy makers began to see regulation as a barrier to efficient functioning of the capital markets rather than a necessary precondition for success," the report said.