As a general rule, diagnosis should precede treatment. But last week, we
saw in both the legislative and executive branches examples of the
"treatment before diagnosis" mentality. In Congress, the first hearings
of the congressionally created Financial Crisis Inquiry Commission was
held under the chairmanship of Phil Angelides, former California
treasurer and former chairman of the California Democratic Party. The
commission was "mandated" by law with reporting back to Congress by
December 2010, "with a series of conclusions about what occurred, and
recommendations as to how to avoid future market breakdowns.
(Disclosure: I provide professional advice to some financial
Chairman Angelides led off his first hearing, at which he had called the
CEOs of some of the leading New York banks with a demand that they
accept blame for the financial crisis, saying he was "troubled by their
inability to take responsibility." With the chairman having decided on
the first day that the bankers were responsible for the financial
meltdown, what is the point of the commission? Can't they even bother to
fake an intent to carry out their responsibilities as the law requires?
Even weirder, the Democratic leadership has made it clear that they plan
to pass their financial re-regulation act before the November elections
even though they legally call for recommended changes from the
Commission to be reported back to them after the election, in December.
Sadly, Angelides' kangaroo-court attitude does not seem to be an
aberration. On Saturday, the president, in the words of the Washington
Post, "unleashed a verbal barrage against the nation's largest banks,
accusing them of wanton selfishness by refusing to accept new
regulations he and his party are proposing, and for fighting a new tax
that Obama wants to impose."
The president proposes enacting "The Financial Crisis Responsibility
Fee," which is a $90-billion tax leveled against the 50 largest banks
that, according to the Post, "Obama called responsible for pushing the
nation into economic crisis. By paying the tax, the nation's largest
banks would settle their debt to taxpayers." That the bank paid back,
with interest, the money loaned to them by the taxpayers does not excuse
them from this new tax.
Note that not only is the president, like the commission chairman,
assuming they know the cause that the commission the president signed
into law is assigned to find out. But also, this new tax would establish
a precedent that any person or business can be taxed or fined for any
harm that Congress thinks they did to the economy.
On this theory, everyone who contributed to the real estate and stock
market bubble, the breaking of which "caused" the crisis, could be taxed
for the "effects" of their economic conduct. Under that theory, everyone
who bought real estate or a stock after, say, 2005, should be taxed for
their crime against society.
Perhaps the Democrats would apply this theory to education. They could tax the
teachers' unions and their members for "causing" generations of ill-educated
But beyond such foolishness, the fundamental danger of this mentality is
that if they are wrong that, basically, the banks caused the crisis,
then their remedies in the form of new regulations and taxes may not
make the economy safer. Rather, they may needlessly encumber and tax our
financial institutions and drive financial business to unregulated Asia
and with it, our future prosperity.
Their theory is that greedy, insufficiently regulated bankers went money
mad, making bad loans, gambling with their depositors' money and thereby
destroyed not only their own banks but the nation's and the world's
It's a simple and time-tested method: Characterize human actions as
sins, and respond to sin with punishment. That is how the Spanish
Inquisition dealt with heresy, and why primitive societies made human
sacrifices to propitiate their gods. Unfortunately, such punishments
didn't end free thinking or the droughts that the primitives thought
were evidence of their sin against their gods. And punishing the human
desire to acquire will not make us healthy, wealthy and wise.
There are other, more plausible theories of what caused the economic
crisis. Larry Summers, now the president's top economic adviser, gave a
brilliant speech in Mumbai in March 2006 in which he pointed out that
the account imbalances in the world caused by China's and other's
excess savings being loaned to the U.S., and not corrected by letting
exchange rates find their natural levels, and the U.S.'s lack of savings
and excessive borrowing would cause severe recession in the near
This trade and capital imbalance problem, many experts believe, was
compounded by the Federal Reserve policy of keeping interests rates too
low too long after Sept. 11. Between those two phenomena, America was
awash in a sea of cheap money that resulted in asset bubbles, excessive
debt and the inevitable petty corruptions that attend bubbles. Add to
these ill-considered government policies the congressional bipartisan
pressure on banks to make bad subprime loans, and you may be approaching
a better explanation for what caused the crisis.
Three quarters of a century on, serious economists are still vigorously
debating the causes for the Great Depression and its persistence.
Wouldn't it be wise to spend at least a few months trying to find out
the real causes of our current economic crisis before committing major
surgery on a financial system that has over the last century permitted
the United States to become the greatest economic engine in human