Chairman Frank, Ranking Member Bachus, and Members of the Committee, thank you for the opportunity to testify on the important topics of Systemic Regulation, Prudential Matters, Resolution Authority, and Securitization. I am a visiting professor at the McDonough School of Business at Georgetown University, and a non-resident scholar at the American Enterprise Institute. I was previously Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009.

Since I last testified before this committee on Wednesday, September 17, 2008--the week that Lehman and AIG failed and just before the introduction of the TARP legislation--a series of extraordinary measures have stabilized the financial system. These include a range of bold and innovative monetary policy actions by the Federal Reserve; a Treasury Department guarantee program for money market mutual funds; the Treasury Department’s Capital Purchase Program and other measures using the TARP authority granted under the Emergency Economic Stabilization Act of 2008; and the Temporary Loan Guarantee Program (TLGP) put in place by the Federal Deposit Insurance Corporation (FDIC). [1]

The stress tests carried out this year provided market participants with assurances regarding the viability of key financial firms. These actions did not prevent a deep and painful recession, but they did head off a meltdown of the financial sector that would have involved an even worse outcome for the U.S. economy.

The topics in this hearing and in the draft Financial Stability Improvement Act of 2009 concern both measures to help avoid a future crisis and proposals to change the way in which the government responds to crises should they happen nonetheless. These issues are closely related, since credible steps that provide certainty to market participants and lead them to believe that they will have costs imposed on them in a crisis would be expected to change risk-taking behavior and thus help make a future crisis less likely (though there are costs to changing investor behavior as well if this means that some productive investments are not funded and thus do not take place as a result). With this in mind, it is useful to first consider the provisions in the draft legislation for new authorities once a crisis starts.

Click here to read the full testimony as an Adobe Acrobat PDF.

Phillip Swagel is a visiting scholar at AEI.

Note

[1] I have previously written about policy steps taken during the crisis in "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Spring 2009.