WASHINGTON, DC – House Majority Leader Steny Hoyer (MD) today spoke on the economy and financial markets at the Chicago Board Options Exchange's Board of Directors Dinner. Below are his remarks as prepared for delivery:
"Congratulations on your 35th anniversary. I wish it had come at a happier time.
"I don’t need to tell you—of all people: We are living through the worst financial crisis of our lifetimes.
"President Bush called last week 'a pivotal moment' in the life of the American economy, and he’s absolutely right. Wild market fluctuations, bank failures, billion-dollar government bailouts—in the weeks and months to come, all of us, not least the people in this room, will be tested sorely.
"And we all understand the consequences of failure.
"It’s traditional to begin a talk like this by saying, 'Now is the time to put politics aside,' as if politics were a dirty word, or a dirty business. And that might be true if politics were simply a contest of pointing fingers. But politics is more than that: It’s the way we as a nation decide what we value; it’s the way we make sense of the present and build our future. Bad political decisions helped bring on this crisis—misplaced priorities and failed planning. Good political decisions—beginning right now, this fall—can help pave our way out.
"So how we got in, and how we get out, are the only things I’ll touch on tonight. I know that the word 'crisis,' although it’s a useful shorthand, is itself a little deceptive: What we are confronting is not a single event, but rather the interrelated collapses of the mortgage, housing, and credit markets. I understand that last week’s events can be traced to a thousand individual decisions, at stock exchanges, at investment banks, and in government.
"But I think it’s becoming clear that there were two deeper causes: a failure of responsible regulation, and a failure of responsible fiscal policy. And we have to understand those causes before we can even think about a solution.
"The fact is that those who had the power to stave off this crisis were negligent, asleep at the switch. I think that the last several years saw three specific failures of responsible oversight and consumer protection.
First, regulators were lax in preventing the abusive lending practices that sparked the subprime collapse. The last attempt to crack down on abusive lending came In 1994: the Home Ownership and Equity Protection Act. But as the housing bubble grew, no further laws were passed to stave off irresponsible lending. And worse, regulators failed for years to enforce the law already on the books, even though they saw the first signs of a subprime crisis as early as 2003.
"Second, as the housing bubble grew, the push for deregulation grew with it. As the Financial Services Committee put it: The Administration and its allies in Congress 'permitted bank regulators to carve out big players from state [anti-predatory lending] laws and then refused to put any new standards in their place.' Those years of neglect saw the proliferation of exotic financial products, such as OTC derivatives, collateralized debt obligations, and credit default swaps—instruments so sophisticated that few, if any, understood their full impact. And yet transparency and common-sense regulation were sorely lacking. For years, the deregulators put service to a rigid laissez-faire ideology above the public interest.
"Third, from 1992 to 2006, our country did nothing to address the safety and soundness of Fannie Mae and Freddie Mac, which turned out to be at the heart of the eventual meltdown. Foresighted efforts at GSE reform were quashed. Former House Financial Services Chairman Mike Oxley made that point bluntly a few days ago. 'All the handwringing and bedwetting is going on without remembering how the House stepped up on' GSE Reform in 2005, he says. 'What did we get from the White House? We got a one-finger salute.' In sum, the dogmatic disciples of deregulation took the referees off of the field and kept them off, at the time when we needed them most.
"The results are clear: The American people are losing. But if the first root cause of the crisis was irresponsible regulation, the second was irresponsible fiscal policy—the record deficits and debt this Administration piled up over the last eight years. They have contributed to a crisis of confidence in the American financial system.
"In 2003, President Bush was predicting that 'our budget will run a deficit that will be small and short-term.' But in reality, the current Administration swung the Clinton surplus $9 trillion in the wrong direction, into record deficits. Huge tax cuts during a war will do that.
"By now, we’ve seen that massive deficits and massive borrowing have two bad results. First, deficits and debt tie up huge amounts of capital that could help the government mitigate an emergency like this one.
"Last year, Harvard economist Kenneth Rogoff testified before Congress that 'the United States’ position as a big net borrower could prove an Achilles’ heel that considerably amplifies the magnitude and duration of a crisis.' He has clearly been proven correct. The federal government has been slow to respond to the meltdown, in large part due to its own weakened fiscal condition.
"Second, I think the case can be made that the government has set a horrible example these last eight years. Is it a coincidence that public debt and private debt hit record highs at essentially the same time? I don’t think so—the government’s example has completely normalized massive borrowing. If our country can’t live within its means, why should individual families? Former Comptroller General David Walker put it well: American irresponsibility, public and private, 'will gradually erode, if not suddenly damage, our standard of living, and ultimately our national security.' Who can argue with him today?
"That’s my view of how we got into this mess—years of shortsighted decisions from a Republican Congress and the White House. We must learn from those years of mistakes if we want to set our economy back to rights, and the Democratic Congress intends to play an active role in doing so.
"In the short term, Congress will take action this week on a proposal to stabilize our markets. The Administration has put forward a plan that will enable the government to purchase illiquid assets clogging up the financial system. The hope, although no one can be certain, is that the rescue will allow liquidity to return to the system and help frozen credit markets to thaw. The first assets to be purchased will be mortgage-backed securities, giving the government the leverage it needs to prevent a new storm of foreclosure and help families keep their homes. Congress will give the plan serious consideration, but given the massive sums involved, transparency and strong oversight are necessities.
"But the rescue package must not bail out bad decisions or reckless speculators, and I believe strong GAO oversight will ensure that. We are tackling this crisis on Wall Street because it’s the best way of helping Main Street. Much more than corporate profits are at stake: jobs, retirement savings, and the state of an entire economy are at stake.
"We will also continue to push for a broader economic recovery package. It could include investments in America’s worn-down infrastructure, which is a proven way to create jobs. It could also mean temporarily increasing food stamp and LIHEAP benefits, or providing assistance to states forced to cut vital services. Not only would that help those most in need, it would quickly inject money into the economy.
"Finally, in the next Congress, we are going to lay the foundation for safety and soundness in the long term, to keep this crisis from deepening or recurring. Under the leadership of Chairman Frank, we will be working hard to restore some sensible oversight to our financial markets—oversight that protects individual investors and taxpayers above all. Already, the Democratic Congress passed comprehensive GSE and subprime lending reform. We also plan on examining capital and reserve requirements.
"At the same time, a Democratic Congress will keep to its pledge of fiscal responsibility, sticking by pay-as-you-go rules except in emergencies. We will not reenact the neglect and recklessness that have defined the last eight years.
"Putting our economy on a sound footing will be the most important work the 111th Congress will face. Long before last week’s news, I was telling anyone who’d listen that the next Congress would be the most challenging I’ve served in in 27 years. You can only imagine what I think now.
"But I remain completely convinced of one point: This is not the time to put politics away. This is a time when we need politics more than ever.
The historian Plutarch wrote: 'They are wrong who think that politics is like an ocean voyage or a military campaign, something to be done with some end in view, or something which levels off as soon as that end is reached. It is not a public chore, to be gotten over with. It is a way of life.'
"Politics, thought of rightly, isn’t a spastic response to sporadic crises. It is the constant caretaking and compromise and vigilance it takes to reduce risk to the smallest possible point. And even though it will never be finished, we can rededicate ourselves to that work today."