At the hearing being held today by the House Oversight and Government Reform Committee, in which former Lehman Brothers CEO Dick Fuld is now testifying, an earlier panel attempted to look at the causes of Lehman's collapse and the broader credit cirisis. And this gave an opportunity to committee members to ride their various hobby horses.
Rep. Carolyn Maloney's horse and "whipping boy" was deregulation. She blamed the entire crisis on deregulation, and specifically the repeal of the Depression-era Glass-Steagall law that separated commercial and investment banking. The repeal was done through the Gramm-Leach-Bliley Act, which Maloney neglected to say was passed on an overwhelmingly bipartisan vote and signed by President Bill Clinton in 1999. Clinton, in fact, recently defended the law, saying it didn't contribute much to the current crisis, and has even alleviated it by allowing banks to save failing brokerages. (Clinton is right, as a Wall Street Journal editorial points out).
But if Maloney wants to know a more proximate cause of the systemic risk from bad mortgages, she should look no further than her own attacks on Competitive Enterprise Institute President Fred Smith when he testified before the House Financial Services Committee in 2000. Maloney was one of many lawmakers who enabled Fannie Mae and Freddie Mac to take excessive risks by ridiculing longtime critics of he government-sponsored enterprises (GSEs) such as Smith. As Smith recalled in a recent op-ed in Investor's Business Daily, Maloney poo-poohed his argument that Fannie and Freddie's government privileges could result in a bailout.
Of Smith's concerns about the GSEs' long-standing line of credit of $2 billion from the Treasury Department, Maloney declared: "It is really symbolic, it is obsolete, it has never been used,"She asked, "Would you explain why it would be important to repeal something that seems to be of little use?"
Smith answered "as long as the pipeline is there, it is like it is very expandable." Then he prophetically added, "It is only $2 billion today. It could be $200 billion tomorrow."
Speaking of Fannie and Freddie, Rep. John Mica, R-Florida, rightly noted at the hearing that committee chairman Henry Waxman, D-Calif., really should be holding hearings on the GSEs as well as Lehman and the upcoming hearing on American International Group. But a hearing on Fan and Fred would highlight the role of Democrats like Maloney (as well as that of a few Republicans such as Mike Oxley of Sarbanes-Oxley fame) and and cast doubt on liberals' central argument that this is all the fault of deregulation and the "free market."
Fortunately, the committee and the audience did get to hear some informative testimony from American Enterprise Institute scholar Peter Wallison, who expounded on the GSEs role in spreading systemic mortgage risk and pointed out that more regulation isn't always the answer.