Conservative Principles Now

The Congressional Oversight Panel (COP), the watchdog board created by Congress to oversee the TARP program, yesterday issued the equivalent of a severe weather warning for commercial real estate markets. Like the residential market before it, the markets for retail, apartment, and other business properties are facing a wave of defaults which, says the panel, “would trigger economic damage that could touch the lives of nearly every American.”

The numbers are grim. According to the COP, over the next four years $1.4 trillion in commercial real estate loans will come due, of which half are currently underwater, sunk by a 40 percent drop in values since 2007. Total losses could be some $300-400 billion. These losses would be in large part borne by mid-sized and community banks, who tend to invest most heavily in to the commercial market.

Certainly, the negative effects of such a meltdown would be significant. The question, however, is how to address it. The COP admits that there is no easy answer.

Possible steps, according to COP, include using government funds to provide fresh capital for affected banks, buying the troubled assets from the banks, and creating a guarantee funds for loans. In other words, extend the TARP bailout program – or key components of it – beyond its current October expiration date to address the problem.

Policymakers should stop, however, before going down this particular rabbit hole again. As a first matter, this is not the sort of threat TARP was created to address. While economically painful, the situation does not threaten a sudden, catastrophic failure that would endanger the functioning of financial markets. None of the banks at risk would threaten the financial system by their failure. And the effects would be spread out over a number of years.

By contrast, TARP-like intervention would impede the ability of markets to function properly. The COP itself warns of the dangers, saying:

“Any government capital support program can create as much moral hazard for small banks as for large financial institutions, and government interference in the marketplace could result in bailing out the imprudent, upsetting the credit allocation function of the capital markets, or protecting developers and investors from the consequences of their
decisions.”

And that’s only the start of the problems. Would intervention lead to federal control of pay and other business decisions at hundreds more banks? To long-term government ownership? To Americans weary of the side effects of the original TARP, these are real concerns.

Perhaps worst of all, intervention would not address the underlying problem: the fact the value of commercial real estate has dropped. No amount of government cash would change that fact.

Ultimately, the best way for policymakers to address problems in the commercial real estate market — and help the financial institutions and the average Americans that would be hurt by its travails, is to improve the economy on which it depends. And that means reducing, not increasing, government intervention in that economy.

According to a report recently submitted to Congress by the Congressional Research Service over 1,000 regulations written by federal agencies over the past decade may be invalid. The reason: copies of the rules were never given to congressional oversight committees as required by law. As a result, pending enforcement cases and other actions under these rules could be thrown out of court.

The problem stems from the 1995 Congressional Review Act, which provides Congress a chance to review and reject regulations written by agencies. In order to facilitate such review, every federal agency is required to provide Congress, as well as the Government Accountability Office, with copies of any rules they promulgate.

Its a minor requirement, and one that comes at the end of a long rulemaking process. But the CRA is clear: no rule becomes effective until Congress is notified.

As it turns out, however, the requirement has often been ignored. Not once, or twice, but — according to the CRS report by analyst Curtis Copeland — over 1,000 times over the past decade. In 2008, for example, some 101 rules were never transmitted. Of these, , 22 were “significant” (i.e. had over $100 million in economic impact), or about 12 percent of the total. Included among the missing were a DHS rule on safe harbors for employers, USDA’s rules on use of roadless wilderness areas, and a DOT rule on truck safety.

The exact legal consequences of the oversight is unclear, but it is possible that the regulations may be void, at least until the agencies send copies to Congress. That would throw all sorts of actions taken under the rules in the intervening years into a legal cloud.

That may seem extreme for a procedural oversight. But the agencie’ failure to follow the law should have some consequences. The CRA was hailed in 1995 as a landmark step to increase congressional control over unelected regulators. If that goal is still to be taken seriously, the requirements of the CRA should be too.

More generally, the kerfluffle underscores the broader problem of lack of oversight for regulators. OIRA — the White House agency charged with reviewing rules — comes in for some criticism in the CRS report for not ensuring compliance. But OIRA, with only 50 or so staffers, in badly outgunned in battles with regulation writers. Congress is even less equipped. Although the Congressional Budget Office is considered an essential component of the budget process, there is no Congressional Regulation Office to give Congress information on the number, cost or effects of federal regulations.

Beefing up these institutional checks, as well as enforcing current law, is essential to establishing accountability in the regulatory process. Even for a White House and Congress which are, to be kind, less skeptical of governmental mandates as they could be, such accountability should be welcome.