"Form a commission."
Those three words are uttered regularly, often cynically, in Washington policy circles. Much of the time it is fair to dismiss the phrase as the classic inside-the-beltway delaying tactic. Any seasoned Washington observer will tell you that the easiest way to make an issue go away is to study it to death.
But there are times when precisely what is needed is the consensus building that comes from asking our leaders and experts to concentrate their minds on solving intractable problems. There are times when the only answer is a breakthrough the ordinary legislative and administrative processes cannot provide. There are times when forming the right commission for the right purpose is exactly the right response.
This is one of those times.
I believe the formation of two blue-ribbon, bipartisan presidential commissions could accelerate our progress in addressing the monumental tasks that confront our nation's financial system. One commission should focus on overhauling the regulatory structure; the other should focus on accounting reform.
These commissions could transform the public policy challenge of stabilizing and restructuring the financial system from a frighteningly unwieldy undertaking to a strenuous but attainable one.
The horrifying financial meltdown has presented our policymakers with challenge upon challenge. The regulatory and accounting policymaking mechanisms are broken, much of the American financial system has been wholly or partly nationalized, and the very future of market capitalism — along with the hope for prosperity that is a cornerstone of American idealism — is at risk.
The commissions would build consensus by providing the policymakers who take office in January with the best thinking America has to offer about our predicament. Each would require the independence and the clout to make its recommendations stick.
There are at least two successful antecedents that can serve as models. One is the National Commission on Social Security Reform ("the Greenspan Commission"), which from 1981 to 1983 resolved the short-term financing problem and made many other significant changes in Social Security law. The second is the Defense Base Realignment and Closure Commission ("the Brac Commission"), which in five rounds dating from 1989 has helped defuse the politically charged task of determining which excess military installations should be closed, when, and how.
I have my own views about what form a regulatory overhaul should take. But it is clear to me that the issue is so big and so urgent that it must be divorced from politics.
A Financial Restructuring Commission should be chosen by the new president in consultation with Congress and should have broad authority to remake the regulatory structure. It should be given sufficient but not unlimited time to come up with a proposal — ideally, no more than six months.
Like the Brac Commission, its recommendations should be self-effectuating unless two-thirds of Congress votes against it. In this way, we can break through the politics and turf wars that have frustrated previous attempts at rethinking financial regulation.
Similarly, our accounting system is in urgent need of reformulation. Fair-value accounting has contributed to the destruction of economic value, because it is flawed. Mark-to-market accounting presupposes that a functioning market exists, but if the markets seize up and shut down, marking to market sets off a cascade of asset writedowns and rapidly deteriorates into a negative-sum game.
Imagine if you had to sell your home or car — for cash — within 24 hours, and the problem with trying to capture an asset's "market" value under extraordinary circumstances becomes evident.
At the root of the mark-to-market problem is a governance weakness that must be fixed. Misconceptions about the accuracy of accounting have led us to a governance model that is too rigid and theoretical. This has produced an accounting structure that, rather than reflecting economic reality, has driven a distorted economic reality.
It goes without saying that accounting must work to provide the public with honest, transparent books and records, including rules and rulemaking that are as transparent as the books and records. But this does not necessarily mean the Financial Accounting Standards Board should exist in its own ivory tower, only loosely tethered to the rest of the government by the Securities and Exchange Commission.
Again, I have my views on how to alter the FASB's governance in a way that better reflects the country's policy needs while ensuring the organization maintains its integrity. However, I would hope that the next president would appoint a blue-ribbon, bipartisan commission modeled on the Brac Commission that would work to improve FASB governance.