What Actually Happened?

Bernanke says the problem at the heart of our recent economic problems was lack of regulation, not (heaven forfend!) Fed monetary policy. Interest rates, he says, were not too low.

Perhaps it wasn't interest rates — and, certainly, I'm not one to argue against greater regulation. The problem is that the financial instruments that brought on the crisis could not have been regulated because nobody knew what the hell they consisted of, or what they conceivably might have been worth. It's pretty clear that the ratings agencies that gave those instruments their AAA ratings didn't have a clue.

In other words, the crisis arose from a straightforward case of market failure, based on lack of information, and what really is needed is vastly more transparency. All securities should be sold on public exchanges, so that all buyers know what others are paying. Buyers should be fully informed of the content of the tranches of securitized debt they purchase, and not have to depend on the seller's optimistic evaluations of risk and reward. When banks hold such vehicles on their books, they should be valued according to real market prices, not imaginary projections of what they might be worth some day — and all of a bank's holdings should be on the books, not hidden away in SIVs.

If a regulator — the Fed, or anybody else — is going to make sure that banks no longer can become so grossly overleveraged that they threaten the world's financial structure, it is necessary to know all about their assets and liabilities. Secrecy (and creative bookkeeping) made the recent crisis possible, and only openness can prevent it from happening again.

And what can we expect from Congress?

My prediction: a little lip service to consumer protection, and a lot of kissing Wall Street's ass.