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Response To Economic Dread Demands Urgency Of 9/11

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The Tampa Tribune

Published: September 21, 2008

It's nowhere near the end of the world, but it does feel like the days immediately after Sept. 11, 2001, when the nation was knocked off its moorings and the future seemed uncertain.

No buildings collapsed in the current economic trouble, but venerable companies have fallen in one shock after another: Lehman Brothers filed for history's biggest bankruptcy; the government bailed out AIG, one of the world's biggest insurers; the government took control of Freddie Mac and Fannie Mae, the nation's two mortgage giants; Bank of America swallowed whole Merrill Lynch & Co. and its famous bull; and the Treasury is underwriting the safety of private money market funds and sending the Federal Reserve $40 billion to "help them better manage their balance sheet."

All told, taxpayers have been saddled with potential liability of $1 trillion, even as many everyday Americans have seen their savings dwindle and their home equity disappear. Many experienced observers are calling it a financial crisis, perhaps the worst since the Great Depression.

Bipartisan Blame

A top-level investigation is essential to find out exactly what went wrong and why.

Sen. John McCain is exactly right to call for a probe on the scale of the 9/11 Commission to get to the bottom of what he calls an "old-boy network" and "corruption."

As in the terrorist attacks, the nation needs to find out who failed to see trouble coming and how they could have headed it off. From the very start the probe needs buy-in from top government officials, support the 9/11 panel never had. Investigators deserve pledges that their recommendations will be a guide for reform, not pooh-poohed.

"I promise you we will never put America in this position again," McCain said. It will be hard to fulfill that pledge until the failures have been exposed.
Barack Obama disagrees, saying, "This isn't 9/11." He argues that everything will be sunny again once the nation abandons Republican policies, but wrongly assumes Democrats have all the answers.

A bipartisan investigation that looks deeply into the crisis would find blame on both sides of the aisle.

Lax oversight and easy credit have their roots as far back as the Clinton administration. In the mid-1990s, President Clinton told the Department of Housing and Urban Development to give more mortgages to low-income applicants. The government also raised mortgage loan limits. A news story at the time observed the change would "stoke the already thriving home-sales market."

And former Republican Sen. Phil Gramm, a McCain advisor until he accused Americans of whining about the economy, was a co-sponsor of the Gramm-Leach-Bliley Act of 1999, which knocked down the wall between commercial banks and investment banks. The legislation passed Congress with strong Democratic support and President Clinton signed it.

Gramm also championed the Commodity Futures Modernization Act a year later, which he said "protects financial institutions from over-regulation." Unfortunately, it didn't protect taxpayers and investors, and should disqualify Gramm from any position in a possible McCain administration.

Game Plan Needed

Treasury Secretary Henry Paulson is right to urge Congress to authorize the purchase of bad mortgage debt, which would be held until property values stop falling. It could be done through a temporary agency like the Resolution Trust Corp. that cleaned up the savings-and-loan disaster.

The government might even make money on some of the mortgages it would buy, and homeowners in foreclosure would be given more time to save their homes.

Writing in the Wall Street Journal, Paul Volcker, Nicholas Brady and Eugene Ludwig laid out the challenge: "The system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.

"Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further and we will have to live through the mother of all credit contractions."

Volcker is a former head of the Federal Reserve. Brady is a former head of the Treasury. Ludwig is a former comptroller of the currency.

Their counterparts in office seem inclined to follow their advice. So far, the Treasury and Federal Reserve have reacted quickly and effectively. Their leaders seem to have piloted us safely through the worst turbulence. But taxpayers are left holding huge stakes in shaky mortgage and investment markets and want to know, who flew us into this hurricane and how do we make sure we never get here again?

Most leaders are focusing on how to stabilize markets and restore confidence. Their job will be incomplete without an honest inquiry into whether the economy's foundations remain fundamentally sound.

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