Madam Chairman, thank you for this opportunity to speak before the Joint Economic Committee. Since its creation by the Employment Act of 1946, the JEC has been the premier congressional forum to discuss economic policy, and as a former staff member of the committee I am honored to participate in this hearing.
I wish to make three points this morning. First, economic history tells us that periods of sharply eroding public confidence in financial institutions have significant negative economic consequences, but they do pass. Also, seeking retribution from persons or institutions perceived to be guilty of contributing to the crisis because of errors of business judgment (as opposed to illegal activity) often does not help, and may actually significantly deter recovery. I am not suggesting that Congress should do absolutely nothing further; for example, a review and probable modification of some existing regulatory and other practices relating to the financial services industry is no doubt in order, but I am urging that caution and moderation be used.
Second, I would observe that this crisis is not simply an example of market failure, of irrational exuberance trumping common sense, thereby requiring government action. I, somewhat reluctantly, supported the $700 billion bailout package and advised some of your colleagues to vote for it. I also believe in perilous times that government has a role to play in restoring confidence. However, I am also convinced that the crisis itself largely reflects a series of public policy miscues. In the absence of these governmental mistakes, this financial crisis would never have happened.
Third, I am very concerned about attempts by an overly zealous Congress to attempt to craft an economic program that likely will have adverse effects. In particular, expansionary fiscal policy in the form of higher government spending is precisely the wrong thing to do at this time, aggravating an explosion in inflationary expectations that I already fear will erupt, having detrimental effects on labor and financial markets. . . .
Richard Vedder is a visiting scholar at AEI.