Another Round Of Farcical Congressional Hearings

The latest round of congressional hearings were just another instance of Congress pretending to do something of value, whilst also demonstrating their astounding ignorance about the current financial crisis:

From Reuters:

“WASHINGTON (Reuters) - Wall Street bank executives squirmed under a public scolding in the U.S. Congress on Wednesday over how they used $176 billion in bailout money without noticeably improving the battered economy…

…They demanded to know what the banks have done with the bailout money, given an ongoing credit crisis that has added to the country’s deteriorating economy.

New York Democratic Rep. Gary Ackerman said that in “the real world,’ people cannot get loans to buy cars or homes or send children to college.

“It seems to me and some of us that this money hasn’t reached the street, that you haven’t loaned it out,” he said.

Democratic Rep. Paul Kanjorski of Pennsylvania was equally baffled, telling the executives that if their banks did not use the money, “Please find a way to return that money before you leave town.”

South Carolina Republican Rep. Gresham Barrett said his constituents “simply have not seen the evidence that the money you were given is working or making their lives better.”

From the WSJ:

“You created this mess we’re in and now you’re saying, “sorry — trust us and by the way we don’t even want the money,’” said Rep. Michael Capuano (D., Mass.) “America doesn’t trust you anymore. Get our money back on the street.”

After reading various articles on the hearings I can’t help but wonder if we’re heading down another path of misguided behavior similar to that which created the credit bubble in the first place. I say this because it appears as if the politicians are hell bent on forcing the banks to behave in a manner that may very well cause their eventual destruction.

In fact I’d even go so far as to say that congress is responsible for a misinformation campaign that is mischaracterizing not only the nature of the TARP program, but the nature of the financial crisis itself. Now maybe they’re doing it by accident because they don’t know any better, maybe they’re doing it because they want to please the electorate, either way the net effect is the same.

What else is there to say when the politicians are pushing insolvent banks to lend more, pretending as if mortgage modification actually works, and are blatantly ignoring the true nature of the crisis in order to push the banks to act in accordance with some fantasy?

Lest they lead us down the path towards economic oblivion our Government needs to wake up to the following:

The Banking System is insolvent: therefore the goal of capital infusions is to enable the banks to maintain current operations and keep from going under, while also helping them survive coming loan losses and other financial strains. Asking banks who are in need of capital infusions to increase their lending is akin to asking a heart attack victim to eat a steak instead of calling 911.

We’re coming off of a credit bubble: a lot of the pain being felt in the economy is the result of people having binged on credit, and/or from having to adjust not being able to use credit to spend above their means. The old lending volumes were unsustainable, and a lot of the net decrease in lending is the result of that adjustment. Furthermore there are plenty of good reasons for NOT lending as much money in an environment like this.

Finally lending only declined by 1.4% last quarter, without the TARP program not only would lending have declined by a much larger margin, but there would’ve undoubtedly been fewer banks to lend in the first place.

The arguments that Congress is making around the banks failing to save the economy via increased lending are mathematically invalid, in fact I’d go so far as to say that their current arguments are the functional equivalent of claiming that 2 + 2 = H.

Mortgage modifications don’t work : whether the person overspent or has experienced a significant loss of income, changing the terms of the mortgage cannot change the fact that lack of income is the core problem. You can’t modify someone out of a mortgage they can’t afford, hence the reason mortgage modifications have been a colossal failure.

Personally I can’t believe the clowns in Congress have the gall to lambast someone else for causing the financial crisis when they themselves ran the mortgage GSEs into the ground .

Perhaps we citizens should hold our own hearings and grill Congress for their own stupidity, as it was well within their powers to either prevent or significantly mitigate the credit crisis if only they weren’t asleep at the wheel. I daresay that many of them were aware of the risks but were more interested in happy sound bites about the alleged wealth the housing market was creating.

As I said last week, I’m sick and damn tired of the Government’s Glass House.

Final Thought: over the years Congress has held hearings on everything from oil prices, to steroids in Baseball to the current financial crisis, yet can anyone name a single positive result that has come out of these hearings?

Well?

Sources:

Reuters: “Wall St. CEOs scolded by lawmakers” — Steve Holland, Karey Wutkowski, February 11, 2009.

WSJ : “Bankers Pledge to Lend, Help Stem Foreclosures” — Maya Jackson Randall, February 11, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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