Bailout Oversight Panel Recommends Eight Changes to Avoid Future Crises

by James Parks, Jan 29, 2009

The congressional oversight committee examining how the U.S. Treasury Department is spending taxpayer money in the Troubled Assets Relief Program (TARP) to help bailout the financial system says the nation needs smart regulation to help prevent another financial crisis and protect our economic future.

The Congressional Oversight Panel (COP) released a report today, which discusses how regulation would have helped avert the financial crisis and how it can help avoid future troubles.

Says COP Chairwoman Elizabeth Warren:

Why does regulation matter? If we had had better regulation we could have prevented the mess we are in today. Good regulation has the power to channel investment into productive economic activity, to make markets safer, and to prevent financial meltdowns.

We are at a crucial moment in our history.  The decisions that we make during the next few months about the rules for our financial system will determine the strength and stability of our economy for the next 50 years.

The report examines how deregulation of financial markets over the past 25 years has added substantial risk to the financial system. The report points to three areas of regulation that could have prevented the current economic crisis: basic consumer protection rules, supervision of credit rating agencies and regulation of companies that are “too big to fail.”  The full report can be found here.

Specifically, the report outlines eight ways to use regulation to prevent future crises:

• Better regulate the way loans are made to consumers;
• Seriously regulate credit rating agencies;
• Better manage dealing with “too-big-to-fail” companies;
• Identify and regulate financial institutions that pose systemic risk;
• Increase supervision of derivatives and off-balance sheet entities that have created a shadow financial system;
• Change executive pay structures to discourage excessive risk-taking;
• Work with other countries to establish basic rules that will apply to companies doing business around the globe;
• Plan now for the next crisis.

Many of these recommendations reflect proposals made in several AFL-CIO Executive Council statements, which you can read here, here and here.

The COP, which includes Damon Silvers, AFL-CIO associate general counsel, is charged with reporting on the Treasury Department’s effort to stabilize our nation’s financial system and make recommendations to improve it.

The group reported earlier this month that the Treasury Department has not yet produced a plan for restoring lending to consumers. It also criticizes Treasury for not spending any money on foreclosure prevention programs and not requiring companies to report how they are spending the first $350 billion in taxpayer dollars.

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