November 4, 2008

November 4, 2008 | Commentary on Political Thought

Congress Can't Police Itself

There's a reason football coaches spend so much time looking at tape of their team's games. By looking back, they can identify mistakes and work with their players to make sure those mistakes don't happen again. Plus, they can make changes they don't have time to implement during the game itself.

The same thing should be true in Congress.

A few weeks ago, lawmakers engaged in a contentious and passionate debate on a$700 billion financial rescue package. Now, everyone should be trying to do two things: a) figure out how we got here and b) do what's necessary to prevent this from happening again.

Indeed, it's vital that we identify what brought us to this point, so we can stave off any future crisis and help restore our economy to sound footing. But it's worth asking: Is Congress really best suited to lead the investigations, given its closeness with two of the biggest government-sponsored entities, Freddie Mac and Fannie Mae? These major GSEs certainly played a critical role in the current crisis, after all.

If the last few weeks have proven anything, it's that we've entered uncharted waters where even the most seasoned financial experts can be left scratching their heads. And with our country heading to the polls soon, it's increasingly difficult to find a fair-minded analysis of the current financial situation free from politics.

This is why it's disappointing to learn that Congress plans to hold congressional hearings to investigate what led to the Wall Street meltdown. In order to understand why this poses a serious conflict of interest, it's important to understand Freddie Mac and Fannie Mae and their relationship with Congress.

Products of the Lyndon B. Johnson administration and his "Great Society"(when our country witnessed one of the biggest expansions of the federal government), Freddie and Fannie were created with the benevolent goal of increasing home ownership in our country.

Unfortunately, like most well-intended government-led initiatives, Freddie and Fannie fell short of their lofty goals. Meanwhile, they created a moral hazard, since they operated in the private sector (selling stock) while enjoying an implicit federal guarantee of their assets.

During the latest housing boom, with homeownership skyrocketing, few questioned the role of these two powerful companies. Unfortunately, many borrowers were living beyond their means. Among those who paid little attention were lawmakers on Capitol Hill.

According to National Journal's Stuart Taylor, Fannie Mae and Freddie Mac were among Washington's most powerful interest group. They spent close to $174 million dollars in their lobbying efforts between 1998 and 2008. Additionally, Fannie and Freddie heavily contributed to both parties' political action committees (known as PACs) to help lawmakers' re-election efforts.

Even the most casual observer can see the egregious conflict of interest in having many of these lawmakers leading the congressional hearings trying to come up with impartial recommendations. A fairer proposal would be to do what many of my colleagues at The Heritage Foundation are proposing, which is to create an independent commission with subpoena powers that can really get to the bottom of this without being tainted by partiality and partisan politics.

Congress should look to the 1986 commission that investigated the space shuttle Challenger disaster. That expert panel made its recommendations in a matter of months.

Our country and the international economy need to know that these investigations are meticulous and fair. This is especially important in New York, where our restaurants and businesses rely on a strong and vibrant Wall Street to do well.  An independent commission is the right approach.

Israel Ortega is a Senior Media Services Associate at The Heritage Foundation.

About the Author

Israel Ortega Contributor, The Foundry
Accounting

First appeared in the  El Diario La Prensa