A capital asleep

OPINION:

Bernie Madoff’s massive Ponzi scheme heightened America’s financial turmoil. So even though it happened under the Security and Exchange Commission’s supposedly watchful eye, politicians raced to claim it as proof we need more political oversight.

Now with the Madoff investigation complete, Senate Banking Committee Chairman Christopher Dodd, Connecticut Democrat, said “The inspector general’s report lays out the string of massive regulatory failures and incompetent investigations at the SEC,” and will conduct a hearing on it.

This illustrates the response all politicians seem to offer once a tragedy or crisis gets media attention. Whether it involves a bridge collapse in Minnesota, a train collision in California, a national financial crisis or massive Ponzi scheme, they hold hearings, point fingers at everyone else and demand solutions, showing what effective public guardians they are.

Unfortunately, their oversight, publically paraded after crises erupt, demonstrates what ineffective public guardians they are.

If regulators and politicians were adequate overseers, they would not need explanations of what was happening under their noses. They would have understood the issues, provided clear warnings and addressed problems beforehand. They would have short-circuited the crises.

Almost every area of American life is overseen by host of federal and/or state regulatory agencies, as well as by congressional and state oversight committees. The problem is that they do their job badly. But they usually evade blame because voters are paying little attention.

When voters are inattentive, politicians’ reap little reward for effective oversight on their behalf. In response, their monitoring is often more fiction than fact. So neither voters nor politicians really watch the bureaucracies, giving them too little incentive to perform the oversight role which is their rationale.

Then tragedies or crises grab people’s attention. Suddenly they want to know what happened and why and be assured that things are being fixed. That surge in scrutiny raises the payoff to politicians appearing to be on top of things. However, the public’s limited understanding allows that portrayal even though it is false. And a major component is redirecting blame elsewhere, to keep inquiring minds from looking under politicians’ supposedly white hats.

There is little substantive evidence of effective political monitoring, but a great deal demonstrating such oversight oversights. The SEC’s failure to detect Madoff’s massive Ponzi scheme is the latest example. But the Fannie Mae and Freddie Mac meltdowns offered even clearer evidence.

While politicians treat each crisis as a one-time surprise, where a one-time response takes the issue off the headlines, there are actually repeated crises. If effective political monitoring went beyond a crisis, when people are watching, that would not be the case. One need only recall the earlier accounting scandals at Fannie and Freddie for an illustration.

Effective monitoring would not offer routine assurances right up to when crises erupt. But the Office of Federal Housing Enterprise, whose 200 employees’ only job is overseeing Fannie and Freddie, issued a report described as offering “only clean sailing” just a few months before being hugely disproven.

Effective monitoring would also eliminate the stark contrast between overseers’ strident demands for instant solutions once issues hit the public radar and their active foot dragging beforehand. For instance, congressional Democrats have led the finger-pointing at the collapse of Fannie and Freddie as market failures (despite them being heavily subsidized government sponsored enterprises). But in 2005, they killed a reform bill that would have kept Fannie and Freddie from stimulating and accumulating the sub-prime loans that triggered the financial distress. Killing real reform and blaming others for the consequences is hypocrisy, not oversight.

Political oversight failures have pervaded the financial system, despite all the efforts put into diverting blame. That provides little reason for confidence that the next government “solution” will be any more effective than the previous one that didn’t prevent the crisis. And it makes trusting promises of “new and improved” monitoring from those who have already failed at it like picking a sentry who says “I fell asleep last time, so you can trust me this time.”

Gary M. Galles is professor of economics at Pepperdine University in Malibu, Calif.