October 23, 2008 | WebMemo on Economy
The current financial crisis has many causes; there is plenty of blame to go around. While immediate action was necessary to stabilize the banking system, policymakers need a better understanding of the roots of the crisis before making permanent changes. Depression-era regulatory structures must be brought in line with a globalized 21st-century economy, but hasty changes could do more harm than good. An Independent Commission on Financial Markets--similar to the 1987 Brady Commission, but chartered by Congress--could provide Congress and the next Administration with the information necessary to make informed decisions about financial regulatory and market restructuring. Appointing a commission now would avoid losing the three months until the next President takes office and allow the commission to work in concert with the newly elected President's transition team.
Three Important Roles of a Financial Market Commission
Public policy commissions can be useful to develop information, overcome structural barriers, and build consensus for politically divisive reforms. A Financial Markets Commission could contribute in all three areas:
For instance, as noted by former SEC Chairmen William Donaldson, Arthur Levitt, and David Ruder: "Before we embark on a radical restructuring of the financial regulatory system, we must understand clearly where the current problems lie, what was and was not done by regulators leading up to the current crisis, and whether new powers are needed to keep pace with financial innovation."
A commission armed with the power to subpoena key players and records could provide a clearer picture of financial markets and identify areas and institutions in need of reform. An independent commission would develop a more accurate picture than that portrayed in the politically charged investigations underway now in Congress.
An executive branch interagency task force is ill-suited to addressing structural regulatory divisions; the very agencies whose jurisdiction or existence need review would be the principal participants. Subsequently, innovative policy is unlikely to emerge from such a group.
Congressional oversight of financial regulation is similarly splintered. At least six committees have major roles in setting policy. Further, Congress itself, by both action and inaction, contributed to conditions creating the current crisis. A commission of sufficient stature and independence could give Congress, as well as the executive branch, the frank advice it may need to make appropriate policy decisions and structural reforms. Such a commission could also help identify basic facts, avoiding the need for factual inquiries by multiple congressional committees.
The Commission's Charter: Issues That Need to Be Addressed
Structure of the Commission
To be successful, the commission must be genuinely bipartisan. For instance, allowing two appointments each by the President and House and Senate minority, and three each by the House and Senate majority (with either party consulting the President-elect), would produce a 12-member commission with partisan balance. Members could choose a chairman and vice chairman from among their number. Staff could be drawn from existing federal agencies.
The Commission's Time Frame
The Brady Commission produced a lengthy and useful report in only 60 days. The two and a half months between the election and inauguration provide a similar period in which a commission could study and report on the current crisis. A commission going to work in mid-November could issue an initial report before the next Administration takes office. Legislation should include a means of extending the commission if the new Administration finds additional study useful.
Essential Components of a Commission
In light of the lack of clear understanding of the causes of the current market crisis, hasty legislative changes in the upcoming lame duck session would be ill-advised. The gap between the election and a new Administration presents an opportunity to appoint a commission to aid Congress and the new President in deliberating before legislating. The following proposals would help create such a commission:
David M. Mason is Senior Visiting Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
William Donaldson, Arthur Levitt, Jr., and
David Ruder, "Muzzling the Watchdog," The New York Times,
April 29, 2008, at http://www.nytimes.com/2008/04/29/opinion/29levitt.htm?
_r=2&oref=slogin&oref=slogin (October 23, 2008).
 These include the Treasury Department and its Office of Thrift Supervision, the Federal Reserve and its regional banks, the Office of the Comptroller of Currency, HUD (housing finance), the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
Executive Order no. 12614 "Presidential Task Force on Market
Mechanisms," November 5, 1987, at http://www.reag
an.utexas.edu/archives/speeches/1987/110587k.htm (October 23, 2008).
 The Brady Commission did spur creation of the Working Group on Financial Markets, which has coordinated government action in the current crisis.
 These include Agriculture (House and Senate), Banking, Finance, Financial Services, and Ways and Means.
 See James L. Gattuso, "Meltdowns and Myths: Did Deregulation Cause the Financial Crisis?" Heritage Foundation WebMemo No. 2109, October 22, 2008, at http://www.heritage.org/Research/Economy/wm2109.cfm.
 See J. D. Foster, Ph.D., David C. John, and Stephen Keen, "Fannie and Freddie: Time to Clean up the Mess and Move Forward," Heritage Foundation WebMemo No. 2055, September 9, 2008, at http://www.heritage.org/Research/Economy/wm2055.cfm.
Brett D. Schaefer, "Gordon Brown's Financial Folly: The Global
Economy Does Not Need More Regulation," Heritage Foundation
WebMemo No. 2107, October 17, 2008, at http://www.heritage.org