What is Congress Doing?

Joe Nocera reports on some bailout hearings last week. He had some moments of surpise and optimism:

“Do you believe that the collapse of large hedge funds pose systemic risk?” [Rep. Henry Waxman] began. “And does this justify greater federal regulation?” That question, in turn, provoked one of the most amazing hearings I’ve ever attended, not because sparks flew but because the hedge fund managers responded with answers I never thought I would hear in my lifetime.

[The hedge fund managers] all agreed with Mr. Waxman, and with the other Congressional questioners, that in certain cases hedge funds could indeed pose systemic risk. All but Mr. Griffin said they would favor at least some regulation of hedge funds. They all agreed on the need for more disclosure. They said they had no problem turning over now-hidden information about their portfolios to a federal regulator. Mr. Simons and several others (though, again, not Mr. Griffin) said that if Congress changed the tax laws in ways that caused them to have to pay more taxes, they would be O.K. with that. I almost fell out of my chair.

Nocerca is a good financial journalist and I hope he didn't hurt himself. But it is not quite that surprising: hedge funds took enormous risks because they had to keep up with everyone' else's enormous risks so they could match their profits. I'm not justifying it, but it is common sense that pitchers could agree with batters that they shouldn't spit on the ball - as long as other pitchers don't do it. That Nocera is shocked is a sign of how ideologically bent finance economics has become.

For a good explanation of what was wrong with the bailout passed in early October, see former World Bank president turned critic Joseph Stiglitz's discussion last month.

I have a few things to say about George W. Bush's ignorance of the simple facts about how much worse the degregulated US banking system has done than its European counterparts, but am still looking for a decent copy of his speech last week.