Press Releases :: May 19, 2009

Subcommittee, Top Economists Discuss the Science of Insolvency

(Washington, DC) – Today, the House Committee on Science and Technology’s Subcommittee on Investigations and Oversight held a hearing focusing on what it means to be “solvent” at a time when financial instruments are far more complex than ever before. Members questioned leading economists on how the tools and theorems from economic science can be applied to making determinations of current solvency and projections of future solvency.

“This Subcommittee has championed scientific integrity as necessary to inform policy decisions. There is plenty of room for debate about policy implications, but scientific facts should be assessed by scientists without political interference,” said Subcommittee Chairman Brad Miller (D-NC). “If we have ever needed sound, neutral evaluation of economic facts upon which to base policy, it is now.”

The Subcommittee took testimony from prominent economists: Jeffrey Sachs, director of the Earth Institute at Columbia University; Simon Johnson, Ronald A. Kurtz professor of entrepreneurship at MIT’s Sloan School of Management; Dean Baker, co-director of the Center for Economic and Policy Research; and David John, senior research fellow at the Heritage Foundation.

Balance sheets of financial institutions have become far more difficult to understand as the percentage of assets consisting of direct loans, which have a relatively straightforward valuation, diminished and that of derivative instruments grew. The turmoil in the real estate markets has brought to light the difficulty of valuing assets based on such common financial instruments as mortgages.

“Many credible economists are not persuaded when regulators peek into the black box of banks’ assets and liabilities and declare that there is nothing to worry about,” Miller stated, pointing out that the same regulators “not that long ago told us that any problems in the financial sector arising from mortgage defaults would be easily ‘contained.’”

Both Congress and the Administration, he noted, are working to improve the nation’s financial health, “but there has been remarkably little discussion of the precise nature of the illness. The diagnosis of the illness, the determination of what is wrong with our economy, appears to be a factual question, not a policy decision – but it is a factual question with enormous policy implications,” added Miller.

The Committee has jurisdiction over the National Science Foundation (NSF), which is a key funding resource for economic research across the federal government.

For more information, please visit the Committee’s website.

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