Friday, October 10, 2008

The Sky Is Falling

The headline of the Washington Post blared "The End of Capitalism?" in a story that was pasted on the front page of the local Hartford Courant, along, no doubt, with numerous other local papers around the country. It's not 1932, but 2008, where fear and irrationality seems to have swept the nation.

What's so disheartening isn't just the blame placed on free markets and deregulation, but the complete and utter lack of understanding of financial markets and financial regulation. I'll admit, I know very, very little and the past month has been a bit of a crash course for me. But what I do know is that the rhetoric is far removed from reality. The name of the game is to blame deregulation and label this entire crisis a market failure. Which would be fine, except for the obvious fact that government has a culpable role here. To say that the government didn't have policies encouraging home ownership and easy credit would be just plain false and to say that such policies had no impact on the housing bubble would be just plain stupid. This isn't to say the market didn't fail. Markets rise and fall all the time and companies that make poor decisions go under. That's the nature of markets. But what happened here was made all the worse not by greed, which is ever present in a free market system, but by the specific policies that helped to push or nudge the market to where we are today.

Yet from politicians and the media alike we're being fed lines that the problem here was deregulation and if you're a Democrat partisan, the problem was the Bush administration's "wild west" approach to stripping away any oversight of the financial community. What's maddening is the lack of any real detailed explanation- what regulations that were cut actually helped to cause this crisis? What regulations would have helped avoid it? As I've pointed out time and time again, regulation is not a magic wand and unless your of the opinion that the government can do no wrong, than what regulations actually say and what effects regulations have, actually matter.

The constant barrage that "deregulation precipitated this crisis" along with the language of "the wild west" leaves many Americans thinking that there literally was no regulation and no oversight of financial institutions, which is just facially absurd. Just go to the CFR and look at Title 12 on Banking or Title 17 on Commodity and Securities Exchanges. There are literally thousands upon thousands of pages of regulation. If someone wants to make the argument that X regulation was taken off the books or that Y regulation wasn't in place, then so be it, but running around like a chicken without it's head, blaming deregulation, amounts to nothing more than spouting a talking point.


Anonymous rose said...

Frustrating huh?

I'm in the same boat as you. I know enough about banking regulations to know that I don't know much.

But we have a few indisputable facts that should be accepted.

1) Democrats have pushed home ownership as if it were an entitlement for decades. The community reinvestment act, the origination of Fannie and Freddie and reduction of their capital requirements, democratically connected leaders at fannie/freddie and flow of cash from fannie and freddie to anyone that would protect them in congress and democratically controlled groups like ACORN...these are largely democratic creations so that democratic politicians could go up in congress and blast republicans saying that they hated poor people and didn't want them to enjoy the american dream.

2) The result of such efforts was home ownership by people with out job histories, poor credit ratings and insufficient income and worth relative to the size of their home.

3) The current economic crisis' catalyst was the decline in home prices that triggered the sub-prime meltdown. These people who bought $300k homes with little to no down payments, nothing in the bank and a 40K salary could not pay off their rising interest payments as home prices dropped.


You can talk glass-steagall or whatever, greenspan's low interest rates, corporate greed hah! and whatever else you want after you accept the facts of this situation.

Institutions that didn't participate in giving loans to people who couldn't afford them 1) couldn't compete with competitors who were and 2) were sued by obama and acorn and chastised by barney frank and the like.

Let's set the record straight on the simple facts...unfortunately mccain has to be able to explain this to the american people in 30 seconds or less, which he can't do.

The same people who got us into this mess now will have to get us out of it. Amazing.

12:04 PM  
Anonymous rose said...

The mainstream media has succeeded at portraying the mention of Wright and Ayers as a smear.

Associations are relevant no matter what. But when we are talking about Obama, someone we know very little about, it is truly unbelievable.

Imagine if Palin, a new comer that we know little about launched her political career at the house of an abortion clinic bomber in 2000 before running for mayor. Imagine if her closest friend and advisor for 20 years was John Hagee and Hagee is a saint compared to Wright.

Unbelievable. Unfortunately, McCain has waited too long to talk about this stuff. He bought into the ridiculous notion that these associations are off limits.

12:12 PM  
Blogger lonely libertarian said...

Some thoughts from others on Glass Steagall. From what I understand, the elimination of this regulation involved eliminating the regulatory distinction between commercial banks and investment banks. Given that the commercial banking industry seems to be doing okay, I'm not sure what the bad news is. Without Glass Steagall's repeal, JP Morgan wouldn't have been able to buy Bear Stearns and Bank of America wouldn't have been able to buy Merrill Lynch.

12:25 PM  
Anonymous rose said...

My understanding is that Glass Steagall allowed investment banks to operate more leveraged than commercial banks. Reason being is that investment banks assets tend to be more liquid; equities, bonds etc. Therefore if their equity began to dry up they could liquidate and reduce their liabiilties more effectively.

Commercial Banks assets are less liquid; CDs, mortgages etc. Therefore they need more cushion if losses pileup because they can not liquidate as quickly.

They eliminated the distinction in 1999 under Clinton.

I don't know if that adds anything to our understanding. Still don't see how any of this is Bush's fault.

12:33 PM  
Blogger lonely libertarian said...

And look, I just can't take the partisan stuff at this point because it's ridiculous for either part to attempt to wash their hands and claim innocence. Republicans controlled Congress for 12 years, from 1994 to 2006, so they share in the blame for anything and everything that was done or wasn't done over that time.

Right now we have a Republican presidential candidate who advocated spending billions more to nationalize people's bad mortgages. We're teetering on the verge of socialism and the Republicans have been utterly complicit in it.

Democrats are certainly no better, but over the past few weeks I've completely lost faith in Republicans as the party of free markets.

1:29 PM  
Anonymous rose said...

The republicans are taking all the blame in the court of public opinion and democrats have effectively washed their hands of it and the media has enabled it.

That's wrong. There wasn't enough consensus in the republican party to do anything about the situation given the fact that the other party was uniformally against anything

It's bull to claim they equally share the blame here. The election is being decided by a false notion.

1:44 PM  

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