Congress Draws on Prof’s Paper

A congressional panel has adopted Harvard Business School Professor David A. Moss’ recently released paper as the basis of its recommendation for increased regulation of financial institutions.

The paper, written in January but released online last week, suggested that regulations are effective at preventing crises such as the current economic meltdown.

Moss said he conducted research on behalf of the Troubled Asset Relief Program Congressional Oversight Panel, which was composing a statement on regulatory reform. The panel’s report drew on Moss’ work to promote insuring and overseeing “systematically significant” financial institutions.

Moss suggests that New Deal regulations were effective, but that their success created complacency.

“Many took for granted the remarkable stability that had been achieved,” he said in an interview. “From there, it was easy to accept the philosophy that we didn’t need regulation. But the truth is that regulation was needed, and we should have thought hard about how to update our regulatory system as the financial markets evolved.”

To address these concerns, Moss’ report proposes that a government agency should identify systematic risks, regulate them, and insure them against failure.

The Congressional Oversight Panel added this proposal to their report.

The panel includes three Harvard affiliates: the chairwoman, Law School Professor Elizabeth Warren; attorney Damon A. Silvers ’86, who also holds law and business degrees from Harvard; and former New Hampshire Republican Senator John E. Sununu, a Business School graduate.

Moss said he had been contacted by a number of government officials intrigued by his ideas.

“There’s been a significant amount of interest, and it strikes me as very positive and healthy,” he said.

However, Sununu and the panel’s other conservative, Rep. Jeb Hensarling, a Republican from Texas, objected to the paper’s conclusions.

In a dissent to the report, they argued that guaranteeing insurance creates moral hazard and reduces innovation.

“Instead of creating new regulatory hurdles, a superior approach to better protect consumers and preserve wealth-creating opportunities is to enhance and reinforce [existing] wise regulation,” they wrote.

Regardless of partisan opinions, some scholars said they believe that portions of Moss’ findings are infallible. Business School economist Rafael M. Di Tella said that the government’s readiness to insure large institutions deemed vital to the U.S. economy—even without prior agreements—means additional regulation would only reduce moral hazard.

“Once we [have an implicit guarantee], his approach has to be correct­—has to be,” Di Tella said. “In a very uncertain time I think that’s a very strong statement to make.”

—Staff writer William N. White can be reached at wwhite@fas.harvard.edu.