Wednesday, December 16, 2009

Honohan Calls for Investigation into Financial Crisis

According to the Irish Independent, Central Bank Governor Patrick Honohan "wants a US-style congressional probe into who and what was to blame for the series of events that triggered the worst recession in living memory." RTE reports that the suggestion has found widespread support from politicians. The Irish Economy blog offers a link to Honohan's opening statement, where he says, "I expect that the Oireachtas will, in time, decide to authorise some form of inquiry to try to understand the deeper, underlying causes of this crisis so that wider lessons can be learnt for the future."

The Independent calls this an "unprecedented intervention by a Central Bank Governor." His call is for "an investigation that would involve a detailed examination of the activities of banks, the civil service and key politicians." Such an investigation "would require testimony from economic experts and social scientists."

In principle, this is a good idea and a systemic public examination of what went wrong is essential. However, merely following the US model and holding congressional hearings may not be the solution given the massive skill and resource differences that obtain across the pond. Despite the superior resources, an examination of the records of some of hearings held by congressional committees only shows that they are more suited to political grandstanding than proper investigation. For examples of relevant committee hearings, click here, here, and here. Following this model will be a waste of taxpayer money.

A more appropriate approach would be to constitute an independent commission comprised of experts, tasked with a comprehensive examination of the causes of the crisis. This could include politicians. The independent 9/11 commission could serve as an example. This was a bi-partisan commission created by statute to report on the circumstances surrounding the 9/11 terrorist attacks, the state of security preparedness, and the response in the immediate aftermath.

Even if the recommendations of such an independent commission are not implemented because political will is lacking, the process will establish credible information about the causes of the crisis and identify areas for regulatory action. This should be the first step in the reform process. The current window of opportunity must not be lost and the government must act immediately.