Washington Impedes A Financial Sector Recovery

Gordon Crovitz writes a weekly editorial column in the Wall Street Journal entitled "Information Age." On Monday, it was entitled, "Credit Panic: Stages of Grief," and it dealt with how are Federal government is actually prolonging the healing of our financial markets by its explicit denial of its own role in starting the mess.

Specifically, Crovitz writes,

"This matters because regulatory denial is suppressing confidence in markets, especially now that the country's financial capital is in Washington, not in New York."

Crovitz notes the House grilling of Greenspan and their attacks in hearings on rating agency executives, while ignoring their own culpability. He continues,

"Politicians of all parties thrive by shifting blame. Congress has not even held hearings yet in the area where it is most clearly responsible: social engineering through banking by pumping mortgages to unqualified borrowers via Fannie Mae, Freddie Mac and laws that require banks to make bad loans. Hearings are promised after the election."

Don't hold your breath on that one.

Citing Robert Higgs and Amity Schlaes' works, Crovitz reminds us of a still-ignored truth. That is, FDR prolonged the Great Depression with his 'regime of uncertainty.' Both authors have recently published works noting that confiscatory tax rates, crowding out of private investment by public fiat and takings caused private capital to flee the economy. This led to an extended Depression.

Rather than be lauded as the hero who pulled us out of the Depression, FDR was, in reality, a ham-handed economic mis-manager.

Crovitz maintains, reasonably, that Washington's failure to assure clarity and transparency in many of the modern financial instruments- swaps, derivatives and structured financial instruments- resulted in market-damaging uncertainty.

He closes by contending,

"A proper role for government is to require better disclosure of information. This would help balance risks and rewards. Just as in the 1930's, more transparent information would restore trust in financial markets, both in Washington and on Wall Street. If Washington can catch up to the private sector in admitting its mistakes, we can move beyond the credit crisis and forward to restore stability, with an end in sight to the current cycle of grief."

I believe Crovitz is correct. Unfortunately, I don't see it happening if the current Congressional majorities remain.