Keith Hennessey, Douglas Holtz-Eakin vote to remove phrases “Shadow Banking”, “Interconnectedness”, “Deregulation” from FCIC Report.

Why, oh why, can’t we have better Republicans thinking about the financial system?

So the Financial Crisis Inquiry Commission (FCIC), the bipartisan panel created to study and issue a report on the financial crisis, imploded. The four Republican appointees – Peter Wallison, Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin – have decided to go it alone and issue their own report Wednesday. Politico, and the Wall Street Journal have more.

This will no doubt play into a “Democrats say one thing, Republicans say another thing, who can really tell?” narrative, but what is leaking out of the Republican worldview on the financial crisis is disturbing. Shahien Nasiripour, Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis, catches this gem:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

“I think a number of us had really pulled for” bipartisan consensus, said Born, a Democratic commissioner who famously tried to regulate certain derivatives as head of the Commodity Futures Trading Commission. “But this action by the Republicans indicates they have decided to go their own way.”…

Hennessey and Holtz-Eakin, for example, have missed about half of the commission’s meetings since [early August], according to a person familiar with the panel’s activities.

Oh. My. God.

I did an interview for the Atlantic Business section about the shadow banking system with Perry Mehrling last year, who has now written a fantastic book about the subject, The New Lombard Street. Gary Gorton has written an influential paper, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007”, about this topic which is now also a fantastic book. Banks have well known problems, and one thing we’ve learned from the crisis is that you can provide maturity transformation – function just like a bank, have bank runs just like a bank – without hanging a sign with the word “bank” on your storefront.

How to deal with this, how to fully understand it even, is crucial to understanding the crisis and the way forward.  Here’s Gillian Tett covering a fascinating (and detailed) report by the Federal Reserve Bank of New York Staff Reports titled “Shadow Banking.” Every person I know interested in this topic is reading it, trying to understand the complicated nature of the topic;  the idea that the GOP would think this new crucial report shouldn’t be covered because of its name and topic is really disturbing.

Even if you think this narrative is overplayed it needs to be discussed and examined. That they would vote to not even use the words says all you need to know.

For fun, Keith Hennessey, October 17th, 2008, What caused this financial mess? (my bold):

Some of these large financial institutions were so big and so interconnected with other institutions, that their failure would create a domino effect. This is what we call “too big to fail”, which should more precisely be called “too big and interconnected to fail suddenly”.

Liquidity – Banks normally loan money to each other for short periods of time. But now Large Bank doesn’t want to lend to Big Bank, because Large Bank fears Big Bank might be insolvent and not be around to pay them back. So Large Bank charges Big Bank more (a higher interest rate) for this short-term borrowing. We have seen this in dramatic fashion as the interest rate that banks charge either, called the London Interbank Offerer Rate (LIBOR) has spiked up. Large Bank may shorten the term of their lending – being willing to loan to Big Bank overnight, but not for 30 days. In an extreme case, Large Bank may not lend at all to Big Bank. To oversimplify, banks don’t trust each other enough to lend. This breakdown in trust/confidence among large financial institutions is a core problem in our financial system. [Shadow bank run.]

I wonder if Hennessey is going to scrub his blog of words he doesn’t think are appropriate for describing the financial crisis – like “interconnected” – in the government report he is writing.

Krugman also comments.

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16 Responses to Keith Hennessey, Douglas Holtz-Eakin vote to remove phrases “Shadow Banking”, “Interconnectedness”, “Deregulation” from FCIC Report.

  1. Chris Gaun says:

    So sad. Although I never agree with Keith Hennessey’s opinions I always thought he was, at very least, one of the (only) non-ideologues in the GOP. This move though doesn’t even make nonsense.


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  3. Justin says:

    One can only hope that journalistic ethics permits — in addition to ‘he says, she says’ — a comparison of commissioners’ earlier statements with this, their Official History. Or maybe we have to leave that bit of digging to the likes of Stewart and Colbert, as usual.

  4. John F. McGowan says:

    This is totally predictable.

    Conservative, libertarian, and business sources consistently blame the government aggressively when policies initially labeled as “deregulation” or “pro-business” or one of a laundry list of other terms used interchangeably for policies they favor.

    Numerous government policies and programs were and have been blamed for the Great Depression.

    This happened after the saving and loan debacle in the 1980’s. Conservative, libertarian, and business sources were “shocked, shocked” to discover the fine print in the “deregulation” that increased government guarantees to the savings and loans while at the same time removing restrictions on risky “investments”.

    It happened in California after the “electricity market deregulation” fiasco. The fiasco was blamed on — yes, you guessed it — environmental regulations and environmental activists.

    It happened with the Internet Bubble, especially with George Gilder’s mostly failed investment advice. Gilder in particular blamed the all purpose government scapegoat, the Federal Reserve.

    There are probably many other examples, left as an exercise to activists looking for ammunition.

    Note that the policies are labeled as “deregulation” or “free market”. They often have substantial differences from the “free market” ideal, as in the increases in government guarantees during the savings and loan “deregulation” of the early 1980’s or the implicit “too big to fail” guarantees in the current financial crisis.



  5. A, Palo Alto, CA says:

    Apparently they (Wallison, Hennessey,Thomas, Holtz-Eakin ) took the anti-hero of the Harry Potter to heart; and now we learn that “he whose name cannot be told” is Wall Street, also known (whisper) as Lord Voldemort.
    Or do they think that Wall Street and shadow banking are “The Eternal…The Indescribable since no one has grasped him to describe him. He whose Name cannot be told, because there was no one before him to give him a name,” as it says in the Apocryphon of John. (If the latter, it makes clear whom they really worship as their Lord).
    If there were any competent journalists ever interviewing them, the question is obvious:
    ‘Why do you think that Wall Street and shadow banking should never be mentioned…?’ But there aren’t any (comp.Journos) left, at least at the major papers/TV channels.

  6. Tom Maguire says:

    Before rushing to judgment…

    It is possible that they are rebelling against sloppy thinking and in favor of specificity.

    Arguably, the report shouldn’t talk about “Wall Street” unless it is giving the address of a meeting – they should tell us about money center banks, US branches of foreign banks, investment banks, hedge funds, insurance companies, pension funds, or whatever.

    Same with the vague “deregulation” – surely the report can attempt to attach specific consequences to specific deregulatory activities undertaken by specific regulators.

    I can’t speak to “Interconnection” and “shadow banking” but maybe they meant something a few years back and now have become buzz words meaning “Something troubling I can’t be bothered to explain”. If so, they ought to explain it.

    Or the whole exercise could be a revolt by the free-marketeers and Greenspan apologists. Time will tell.

  7. Tom Maguire says:

    Oh, Keith Hennesey has posted the interim “primer” on his blog:

    Click to access Financial-Crisis-Primer.pdf

    It is 13 pages.

  8. Mike says:

    It’s 9 pages if you take out the introduction. And it is more like 8 if you leave out the block quoting they do from This Time It’s Different.

  9. John F. McGowan says:

    I have to ask in what way are JP Morgan Chase, Goldman Sachs, Citigroup, Bank of America, Wells Fargo and the other “Too Big To Fail” institutions not Government Sponsored Enterprises (GSE’s) like Fannie Mae and Freddie Mac. With TARP and trillions of dollars in below market rate loans and what not from the Federal Reserve, what is the distinction in reality? Who is the “Government” and who is the “free market” or “private sector”?

    What we have are people who are using terms like the “free market” or the “private sector” as labels for government programs (JP Morgan Chase, Goldman Sachs, etc.) that they favor and the “government” as a pejorative label for other government programs, often administered by civil servants who make small or non-existent campaign contributions and purchase little or no advertising in the mass media, such as “Social Security” that they do not favor.

    Rather than blindly accepting the framing of the issues as the “government” versus “the private sector” or the “free market”, is it not better to firmly and aggressively challenge this misleading misuse of the English language?



  10. Scott says:

    Why waste time reading their report when you’re going to criticize them regardless of what it says. I applaud you for your productivity and efficiency. Nicely done.

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  12. Aroy says:

    I cannot say enough how sad and depressing this is…..

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