Yesterday, the Joint Economic Committee of the U.S. Congress held a hearing entitled "Restoring the Economy: Strategies for Short-term and Long-term Change," to discuss a variety of issues relating to the current market crisis and possible actions that could be taken to shorten the recovery period. Testifying before the Committee were the following witnesses:
Roger C. Altman, Chairman and CEO, Evercore Partners, Inc.
Joseph Mason, Professor of Economics, Louisiana State University
Adam Posen, Deputy Director, Peterson Institute for International Economics
Paul Volcker, Chairman, President’s Economic Advisory Board and Former Chaorman, Board of Governors of the Federal Reserve System
Representative Carolyn B. Maloney (D-NY), Committee Chairwoman, in her opening remarks, emphasized the severity of the financial markets crisis and the need to renovate the entire regulatory system. This sentiment was echoed by former Federal Reserve Chairman Paul Volcker and the other witnesses. Mr. Volcker explained that the current crisis is not simply a financial crisis, but rather a larger economic crisis that has resulted from a “tremendous” build up of debt, coupled with a lack of savings, and “facilitated by the modern alchemy of financial engineering.” He suggested strong restrictions on banking organizations participating in risk-prone capital market activities, but noted that trading and transaction-oriented financial institutions could likely be less intensively regulated. He also noted that some regulatory reforms would need to be international in their scope in order to avoid regulatory arbitrage.
Mr. Posen’s testimony focused more narrowly on bank failures and the appropriate response to insolvent banks. He suggested that stress tests conducted on financial institutions should be “merciless,” and that if these tests show that a bank is insolvent, small insolvent banks should be closed, while very large insolvent banks should be nationalized. In contrast, Professor Mason argued against the concept of “too big to fail,” stating that it cannot be justified by the purported systemic importance of a given institution. According to Professor Mason, insolvent institutions of all sizes are “value-destroying institutions that need to be closed.”
For the most part, the witnesses seemed to be pleased with the Obama administration’s response to the financial market crisis. Mr. Altman noted that the public credit market is beginning to show signs of thaw, and that although the federal response has not been perfect, it has been “quick, large, and rather creative.” Mr. Posen did state, however, that the federal government has not proceeded with the degree of urgency that he believes is required.