At the hearing being held today by the House Oversight and Government Reform Committee, in which former Lehman Brothers CEO Dick Fuld is now testifying, an earlier panel attempted to look at the causes of Lehman’s collapse and the broader credit cirisis. And this gave an opportunity to committee members to ride their various hobby horses.

Rep. Carolyn Maloney’s horse and “whipping boy” was deregulation. She blamed the entire crisis on deregulation, and specifically the repeal of the Depression-era Glass-Steagall law that separated commercial and investment banking. The repeal was done through the Gramm-Leach-Bliley Act, which Maloney neglected to say was passed on an overwhelmingly bipartisan vote and signed by President Bill Clinton in 1999. Clinton, in fact, recently defended the law, saying it didn’t contribute much to the current crisis, and has even alleviated it by allowing banks to save failing brokerages. (Clinton is right, as a Wall Street Journal editorial points out).

But if Maloney wants to know a more proximate cause of the systemic risk from bad mortgages, she should look no further than her own attacks on Competitive Enterprise Institute President Fred Smith when he testified before the House Financial Services Committee in 2000. Maloney was one of many lawmakers who enabled Fannie Mae and Freddie Mac to take excessive risks by ridiculing longtime critics of he government-sponsored enterprises (GSEs) such as Smith. As Smith recalled in a recent op-ed in Investor’s Business Daily, Maloney poo-poohed his argument that Fannie and Freddie’s government privileges could result in a bailout.

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The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI’s roundup of the continuing finance crisis (and sign up for email updates) here.

NEW: John Berlau responds (and speaks!) in reaction to today’s vote. Updated post and audio clip here.

If you go to the web site of the Alliance for Climate Protection, the group that is sponsoring the $300 million “We Can Solve It” ad campaign, you’ll find the second name on the list of board members is very interesting:

Theodore Roosevelt IV
Managing Director, Lehman Brothers
Chair of the Pew Center for Global Climate Change

Theodore Roosevelt IV is Managing Director at Lehman Brothers and a member of the Firm’s senior client coverage group, which oversees the Firms client and customer relationships. Mr. Roosevelt is an active conservationist. He is Chair of the Pew Center for Global Climate Change, Vice Chair of the Wilderness Society, and a Trustee for the American Museum of Natural History, The World Resources Institute, the Institute for Environment and Natural Resources at the University of Wyoming, and a Trustee of Trout Unlimited.

That’s quite the environmentalist resume, isn’t it? We should also note that Lehman Bros issued a couple of reports on “The Business of Climate Change,” which are rent-seeker’s guides to making money off global warming regulation. If this sounds familiar, it’s the path down which Enron trod.

These reports were enthusiastically greeted by the environmental lobby. They were advised by James Hansen, head of NASA’s Goddard Institute of Space Studies and chief scientific adviser to Al Gore.

Now, I am not saying that Lehman Bros fell because its MD was an enthusiastic environmentalist. It failed because of risky decisions made in the mortgage market. However, its failure - like Enron’s before it - demonstrates that attempting to trade in artificial assets that represent no real value is a supremely risky business. Carbon trading would be just such a risk, dependent as it is on fickle government action. Lehman Bros’ collapse should make Wall Street, utilities and investors equally wary of lobbying for such a market.

Meanwhile, it will be interesting to see if Mr Roosevelt’s name disappears from the boards of the environmentalist organizations as quickly as Ken Lay’s did following the Enron collapse. Of course, Mr Roosevelt is not facing any criminal charges as far as I can make out and he does have a rather spiffy name (who says America has no aristocracy?) so it is quite possible that he will find a happy home heading up an environmental group. After all, his management skills would be just what they need.

Hat-tip: EU Referendum and Icecap

My reaction to Lehman Brothers’ declaring of Chapter 11 bankruptcy and the refusal of Treasury Secretary Hank Paulson and others to take extraordinary Bear Stearns-like measures for the government to prop the firm up can be summed up in three words: It’s about time!

Business failure is not only a permissible outcome of capitalism, it’s a necessary one. As the great economist Joseph Schumpeter has written, the process of “creative destruction” is essential for the market to function. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure.

As Schumpeter wrote in his 1942 book Capitalism, Socialism and Democracy, there is an ongoing “process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in, and what every capitalist concern has got to live in.”

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