Financial crisis is 'like a Tsunami'

"The list of regulatory mistakes and misjudgments is long, and the cost to taxpayers and our economy is staggering," Chairman Henry Waxman said at the Committee on Oversight and Government Reform hearing on the financial crisis and the role of federal regulators.

Testifying was Alan Greenspan, former Chairman of the Federal Reserve System, Christopher Cox, Chairman of the Securities and Exchange Commission, and John Snow, former Secretary of the Treasury under President George W. Bush.

Greenspan highlighted that in 2005 he had raised concerns that the protracted period of underpricing of risk would have dire consequences. Greenspan went on to say that even though he raised concerns about possible financial problems, he could not have imagined it to be as broad as it was. "The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors will be exceptionally cautious. Structured investment vehicles and other exotic financial instruments are not now, and are unlikely to ever find willing investors. Subprime mortgages will also be on that list, this market for which has virtually disappeared," Greenspan said.

Greenspan flip-flopped on issues surrounding regulations in banking institutions and what he had previously stated. In previous interviews, Greenspan had stated that he believed it should be left up to the banks to regulate and not the government. Waxman asked Greenspan if he still thought it was a good idea to let the banks regulate instead of having the government step in. "I was partially wrong with saying that banks should regulate themselves. The problem I'm having is that I still don't understand fully how this crisis happened and why it happened. When the facts change, I will begin to change my view," Greenspan said, commenting on Rep. Waxman's questioning.

Cox said that he thinks one of the reasons why the crisis happened was because a lot had changed since 1999 and the time of the Clinton Administration. "Credit default swaps were just emerging in 1999, but now they are between 10 to 15 percent of the financial institutions, and one of the main issues surrounding the financial crisis," Cox said.

Snow believes that if Congress would have done more in 2005, the financial crisis may be completely different. He said that with a "stronger regulatory set in place back then, and if our Government would have gotten more involved with the issues surrounding credit default swaps, taxpayers would be looking at the economy differently today."

One statement all three panelists and Chairman Waxman agreed on was that the crisis will pass and America will reemerge with a far sounder financial system. Chairman Waxman concluded with the statement that he hopes to further these investigations, and find a "clear cut reason why all of this happened."

Rep. Waxman: The story of the credit rating agencies is a story of colossal failure

“The leading credit rating agencies, Standard and Poor’s, Moody’s, and Fitch are the financial gatekeepers to the economy,” Representative Henry Waxman (D-Calif) Chairman of the Committee on Oversight and Government Reform, said during the hearing on credit rating agencies and the financial crisis.

Jerome Fons, former Executive of Moody’s Corporation, stated that the major rating agencies had missed the impact on subprime mortgages of falling house prices and declining underwriting standards. “A large part of the blame can be placed on the inherent conflicts of interest found in the issuer-pays business model and rating shopping by issuers of structured securities,” Fons said.

Raymond McDaniel, Chairman and Chief Executive Officer of the Moody’s Corporation, said that Moody’s published warnings about the increased risks and took action to adjust their assumptions for the portions of the residential mortgage banked securities market that were asked to rate. McDaniel went on to say that they did not anticipate the magnitude and speed of the deterioration in mortgage quality and quickness of restrictive lending.

Waxman concluded with “The credit rating agencies occupy a special place in our financial markets. Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing t protect the public.”

Continuing the hearing process on the financial crisis,the members will hear from federal regulators, including SEC Chairman Christopher Cox, followed by a hearing with Fannie Mae and Freddie Mac on November 20th.

Bernanke: Second fiscal package would be appropriate

Federal Reserve Chairman Ben Bernanke raised the possibility of a second package of fiscal measures during a House Budget Committee hearing.

Bernanke believes that in the context of a threatened economy it would be appropriate, and suggested steps congress could take to make the package most beneficial.

"Any fiscal package should be well-targeted, in the sense of attempting to maximize the beneficial effects on spending and activity per dollar of increased federal expenditure or lost revenue," said Bernanke.

Bernanke also said that properly timing its release would be a factor so that it would take maximum effect when the economy is expected to be otherwise weak, and that Congress should take care to limit the package's long term effects on the government's structural budget deficit.

"If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit consumers, homebuyers, businesses, and other borrowers."

When prompted, Bernanke declined to state how much Congress should allocate for the package, but said that it should be significant.

Bernanke attributes the recent crisis to the erratic housing market, in which the increase in house prices was followed by a steady decline, coupled with a pattern of irresponsible lending practices.

To mitigate the crisis's impact, the Treasury Department and the Federal Reserve, along with foreign governments and their central banks, have expanded currency swap lines with central banks and established temporary programs to aid problems in in the market for commercial paper.

"The Treasury implemented a temporary grantee program for balances in money market mutual funds...the Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper for money market funds," said Bernanke.

According to Bernanke, the bailout bill also offered resources to improve the current situation. These include providing capital to financial institutions, purchasing or guaranteeing troubled mortgages, and increasing the limits of how much the Federal Deposit Insurance Corporation and the National Credit Union Administration covers, raising it to a quarter of a million dollars.

Despite the attempts by the Federal Reserve and Treasury Department, it is apparent that the economy will not be mended overnight. Bernanke said that since the low demand for housing continues to be put up against the glut of unsold homes, residential construction is predicted to contract into next year and that the general downturn in international trade will continue to affect the U.S. Still, Bernanke contends that inflation should meet levels consistent with price stability due to the de-acceleration on the prices of imports.

"Because the time that will be needed for financial normalization and the effects of ongoing credit problems on the broader economy are difficult to judge, the uncertainty currently surrounding the economic outlook is unusually large," said Bernanke.

Following the hearing Representative Rosa L. DeLauro (D-Conn.) heatedly asked Bernanke if the U.S. was in a recession.

"I don't think it's a fair question for the following reason. Recession is a technical term that was created by academics for studying a certain pattern," said Bernanke.

Bernanke then went on to clarify his answer by responding,

"We are in a serious slowdown in the economy which has very significant consequences for the public and whether it is called a recession or not is of no consequence."

Financial turmoil will not end quickly

"The turmoil will not end quickly and significant challenges remain ahead," Secretary of Treasury Henry Paulson said during a press conference to update Americans on the efforts to end the financial crisis. Paulson stated that he was working with President Bush, Congressional leaders, and both Senators Obama and McCain to find an interim chief financial officer that would "maintain continuity" with Congress and the next administration. The housing correction has been repeatedly pointed to as the root cause for the current financial crisis, and Paulson ensured Americans that "Congress was correct to take swift and bold action." Strong international partnerships must be created and maintained in order for the crisis to end, Paulson said, as he also believes that central banks around the globe are prepared to stabilize the markets.

New direction for world economy

To meet advances in world interconnectivity, World Bank Group President Robert B. Zoelick said that multilateralism must be updated for the 21st century.

"Our's must be a globalization where both the opportunities and the responsibilities are more widely shared...multilateralism, at its best, is a means for solving problems among countries, with the group at the table willing and able to take constructive action together."

Zoelick outlined requirements for the new multilateralism, explaining that it must have a shared goal of improving global political economy and should mimic the flexible nature of national economies.

According to Zoelick, a new, more cooperative, steering committee made up of finance ministers should be introduced to replace the current G7 finance ministers. Zoelick said that this steering group will be designed to adjust with international changes.

Climate change will also be a concern for the new multilateral network, with the proposed goal of reaching a "global bargain" among energy producers and consumers.

"At a minimum, such a bargain should involve sharing plans for expanding supplies, including options other than oil and gas; improving efficiency and lessening demand; assisting energy for the poor; and considering how these policies relate to carbon production and climate change policies," said Zoelick.