As an ardent believer in the free market system, my usual view is the last thing the financial markets—or any other markets—need is government intervention.
Talk about making a problem worse.
Let me be clear: Left alone—completely alone—the free market survives any crisis, if for no other reason than one sector’s misery is another’s opportunity. In short, the free market is the economic version of Survivorman’s Les Stroud.
Financial markets tend to dance the samba—there are dips and upward swings on every beat—and yes, missteps can, and do, happen. And when the fall is especially severe there’s never a shortage of so-called experts [and socialists] predicting economic Armageddon.
Yet, the financial markets always manage to recover and prosper with government sitting on the sidelines doing what it does best—uttering pompous rhetoric and creating havoc, inefficiency and waste, all in the name of helping us live a better and more prosperous life. [For those who offer FDR as a counter, consider that other than deposit insurance and going off the gold standard every other New Deal program proved only to prolong the Great Depression.]
Which explains why I recoiled in horror at the mere mention of government “rescuing” the financial markets with a $700 billion bailout, especially one that makes government the de facto czar of the global financial markets.
Then it dawned on me. Hell, why shouldn’t government get involved? They created this mess in the first place.
The path to today began with President Bill Clinton’s first-term declaration that owning a house is a birthright of every American, regardless of one’s credit history, job security or proven ability to repay the loan.
Normally such a trifecta would be a deal-breaker, but Clinton came to the rescue by eliminating the Glass-Steagall Act—a move that 1] allowed banks to merge with anything resembling a financial institution, 2] created a wave of free-wheeling lending institutions, 3] launched a competitive frenzy, resulting in anyone capable of breath qualifying for a mortgage and 4] gave birth to a wave of exotic, high-risk loans.
Government, determined to free up even more cash to get even more people into houses, upped the ante by telling banks, “Why keep those mortgages on your books? Just bundle the notes and sell them to investors on Wall Street. Bankers, of course, obliged, creating a new wave of cash that was lent to more folks with no money down and, in far too many cases, little money to repay.
To be fair, give Wall Street credit; once invited to the party they hit the dance floor with reckless abandon, inventing ways on the fly to resell packaged loans to return-hungry investors. Greed was good and Gordon Gecko was never happier.
Yet the boys and girls in Washington weren’t done yet, allowing Fannie Mae and Freddie Mac to expand well beyond their charter by buying and funding subprime mortgages and the ever-disastrous Option ARMs—the very loans that have brought this economy to its knees.
There were those in government who repeatedly tried to sound the alarm, like former Rep. Richard Baker [even Clinton realized in his second term that he’d gone too far], but legislators ignored them, perhaps because they were so busy cashing campaign checks from Fannie and Freddie.
The coup de grâce was a slowing economy, prompting the Federal Reserve to encourage all of us to follow the Bush doctrine of spend, spend, spend—deficits be damned.
It’s clear, government’s universal housing plan has failed miserably. Keep this in mind when you hear any politician mention universal health care or that government should do whatever’s necessary to make sure insurance is affordable for all Americans.
Seriously, can you imagine the disaster if these fools get hold of an already screwed up health care system?
Say what you want about Wall Street greed threatening to wipe out your retirement but at least know that with time your money will return. Can Washington say the same about our social security benefits?
So go ahead and blast away at the money-loving, heartless private sector. But history has proven the markets do far better for Americans than our compassionate, big-hearted government.
And, as is always the case when our public servants screw the pooch, it falls on the taxpayers to pay the tab.
Comments
Posted by fourx5 on October 7, 2008 at 11:32 a.m. (Suggest removal)
"Clinton came to the rescue by eliminating the Glass-Steagall Act.....exotic, high-risk loans."
The president can make laws now? I thought you were the honest one at the Business Report. Clinton simply wanting something isn't enough to make the legislative branch write or pass it - especially a legislative branch controlled by Republicans, who offered, passed, and suggested the Act be signed.
Be honest, J.R. The law you're talking about - the Gramm-Leach-Biley Act - was authored by none other than UBS employee and rabid free-marketeer Phil Gramm, who was also McCain's campaign economic advisor until he called Americans "whiners" over the impending financial crisis he helped create.
"Congressional history of the Act:
The bills were introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA). The bills were passed by a 54-44 vote along party lines with Republican support in the Senate and by a 343-86 vote in the House of Representatives. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. <b>Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the Community Reinvestment Act and address certain privacy concerns."</b>
"The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act."
Clinton signed GLBA into law on advice from his Treasury secretary - Robert Rubin.
J.R., both parties made this mess - and it was obviously the Republican move toward massive deconstruction of depression-era restrictions on banks that helped precipitate the biggest crisis facing this country since 1932. The facts are irrefutable.
Stop trying to pretend it's the fault of one over the other.
Posted by jrball (JR Ball) on October 7, 2008 at 12:12 p.m. (Suggest removal)
I've always said both sides of the aisle are responsible. This is not about Dems being to blame... or Repubs being to blame. I only say the Clinton administration and Congress started us down this slippery slope. My point here is this problem was created in Washington, not Wall Street, though private sector greed certainly magnified the situation. Government gave Wall Street the gun and Wall Street pulled the trigger.
When Richard Baker was sounding the alarms it wasn't just Dems who were ignoring him. It was everyone from Maxine Waters to Richard Shelby.
Now to say, Clinton can't make laws is correct. But to imply the Clinton administration wasn't pushing for policies that relaxed lending standards and to say Clinton had no position on the repeal of Glass-Steagall is not correct. He pushed for both. During his second term, and to his credit, he did try to pull in the reigns on Fannie and Freddie but Congress had no interest... probably because they were too busy cashing campaign checks from the mortgage giants.
Posted by jrball (JR Ball) on October 7, 2008 at 12:19 p.m. (Suggest removal)
In re-reading the column, I thought it was an equal opportunity slamming... Clinton, Dems, Bush, Repubs and Wall Street... a little something for everyone.
Posted by fourx5 on October 7, 2008 at 12:44 p.m. (Suggest removal)
I guess you're right on the equal-opportunity angle. Seemed a little one-sided at first.
I agree with you that the Clinton administration was pushing for more lax lending standards. But I hear the canard from so many on the right that it's the sole cause of this crisis that perhaps I've gotten a bit sensitive to it. It's a factor, but a very minor one. The lion's share of foreclosures hasn't come from formerly redlined neighborhoods or nascent urban renewal project failures - it's come from "Joe Six-Pack" in the suburbs who bought more house than he could afford on a teaser rate, then refinanced so he could buy that new bass boat or ATV or other toy.
Would you agree with me that personal finance should be required curriculum in public schools?
Posted by Robin on October 7, 2008 at 1:29 p.m. (Suggest removal)
JR,
I appreciate your Monday article on the financial crisis. Even SNL noted the part that both parties played in their skit this week.
I am very troubled by the apparent cabal that was going on with:
*Acorn pushing banks to make loans to people who should be renters, then
*Acorn pushing social engineering via Fannie and Freddie to facilitate their goals, then
*money from F & F buying support on the hill, then
*the original bail out bill giving money to Acorn!
I would love to see every state kick out any "representative" they have in Washington who took cash from Fannie or Freddie or Acorn.
Posted by pmccarron on October 7, 2008 at 2:42 p.m. (Suggest removal)
Congress can kiss my big Fannie Mae! Bail Out America - fine if you must. BUT DO NOT BAILOUT LIBERAL LEFT WING CALIFORNIA! This bailout has got DEMOCRAT PARTY written all over it. McCain better wake his act up and go on the attack - or he will deserve to lose this election to Obama. Makes me sick to see on TV the very democrat congress that caused this (especially Chris Dodd & Harry Reid), patting themselves on the back for the bailout (VOMIT). And somebody tell Nancy Pelosi to quit waving that crooked little bony finger in my face next time she wants to blame Bush & the Republicans for this Democrat Party Mess. I definitely blame the Democrats and the Community Reinvestment Act passed under Jimmy Carter in 1977 and expanded under Bill Clinton in 1995. Then I blame the mostly Democrat Congress (Barney Frank, Gregory Meeks, Maxine Walters) for ignoring the auditors that warned this was coming and blocking regulation initiatives by the Bush Administration, John McCain, and Richard Baker. Risky Loans that the Democrat Congress and ACORN forced and guaranteed these banks to issue to low income people that could not afford it. Long Live Socialism – can’t wait until they nationalize health care and all our freedom next.
Posted by pmccarron on October 7, 2008 at 8:49 p.m. (Suggest removal)
FINALLY-McCain is coming back! During the debate, He finally nailed Obama on being the #2 recipient of Fannie Mae & the Democrat Congress for being predominantly responsible for this bailout mess. "Like nailing JELLO against the wall" - he didn't let Obama & The Democrat Congress slip by this time around. McCain kicked some real fannie in this debate tonight!
Posted by falling_like_rain on October 7, 2008 at 8:58 p.m. (Suggest removal)
What flawed logic. You claim that the Government is to blame for this mess for reducing their regulation. This would have to mean that the initial government action was correct and appropriate? The mess here is due to Wall Street alone. The government did not issue bad loans, stupid lenders did. Then Wall Street deciced to buy the loans in big packages. When these firms realized that other firms wouldn't buy the bundles because they seemed to risky, CEOs bet their entire firm's future on being able to sell the product with swaps (a form of unregulated insurance). When the housing market faulted, the swaps came due and companies that had issued a greater value in swaps than their own liquidity could cover (an illegal action had the swaps been called what they were...insurance) found themselves on the verge of collapse. Wall Street gambled big. No government action necessary. Without government oversight and prudent fiscal policy, Wall Street is subject to greed that endanges the stability of the entire economic system. Without the swaps, most of the mortgage packages would have been difficult to unload. This would have contained the problem to the bad lenders and free enterprise would have weeded out improper loaning practices through institutional extinction. Fannie and Freddie may have allowed bad mortgages to exist, but the Risk Management Teams on Wall
Street deserve all the credit for making this a national crisis. I do not support the bailout in hypothetical scenarios where markets correct themselves, but inaction in Washington would have undone the trust the financial system has in Washington and could have precipitated a long lasting recession. Perception is more important on Wall Street than the actual impact. Inaction would have been disasterous.
Posted by pmccarron on October 8, 2008 at 8:46 a.m. (Suggest removal)
Yes! Blame Government De-Regulation on the Regulation of the De-Regulation Act of the Regulation Act that was imposed on the banking industry in the first place!
Posted by pmccarron on October 8, 2008 at 9:03 a.m. (Suggest removal)
Blame Jimmy Carter, the Community Reinvestment Act (CRA), Bill Clinton, The Democrat Congress which mandated, repurchased, and guaranteed mortgages via Fannie & Freddie.
In 1977, Jimmy Carter created CRA to mandate bank lending to low-income borrowers upon the banking industry and prevent “red-lining”. In 1995, Bill Clinton expanded Fannie to guarantee and purchase high risk loans from the banks in compliance with CRA. Fannie & Freddie buy loans from the banks and non-bank mortgage firms. Repackage the loans, as mortgage backed securities, and sells them to WallStreet, with a GOVERNMENT GUARANTEE that the interest and principal would be paid, whether or not the original borrower pays. By purchasing the risky mortgages, Fannie provided banks with free money to make new loans. Low Income Borrowers took the free money, Banks resold the loans to Fannie. Fannie sells the loans to the secondary market as guaranteed securities. Congress (Predominantly Democrats) ignored warnings from the Fannie Auditors and Bush Administration. The Tax Payer is left with the bill for the Government Guarantee.
And I thought John McCain won the debate last night - but according to the news nobody won - so what do I know - I am just another tax payer.
Posted by jrball (JR Ball) on October 8, 2008 at 10:22 a.m. (Suggest removal)
Keep in mind, government was putting regulatory pressure on banks to increase the amount of mortgages issued. I'm not saying the private sector is blameless, only that government threatened to punish the lending agencies if they did not increase minority and low-income mortgage approvals. I'm well aware of greed, but I find it difficult to believe banks and other mortgage lenders were so knowingly approve SO MANY high-risk, no-down payment mortgages unless pressured to do so by the government. That explains how the mortgages were issued in the first place... what's mind-boggling on all accounts is that there was this general belief that the real estate market would always grow and never suffer a setback. In the end, I'm simply saying there's plenty of blame to go around and it makes me sick to see Congress acting so pious as if they had nothing to do with this.
Posted by Being_Stupid on October 8, 2008 at 12:25 p.m. (Suggest removal)
The Government has done such a good job with providing affordable home loans and public education. I can't wait until they nationalize our health care system too. I like it when the government takes care of me because I am too stupid to do it for myself.
Posted by funkyspur on October 8, 2008 at 4:53 p.m. (Suggest removal)
I generally enjoy reading your work, JR, but this one surprised and disappointed me. We all are free market adherents to varying degrees in the US, but as James Madison said in Federalist #51, "if all men were angels, no government would be necessary."
I suggest you take a closer look at the Commodity Futures Modernization Act of 2000. Yes, President Clinton signed this into law, but we know which body makes laws. This law amended the Securities Exchange Acts, Gramm-Leach-Bliley, and the Legal Certainty for Bank Products Act with the intent of providing "regulatory relief" for securities, particularly for futures contracts, derivatives, and credit default swaps.
The latter two are such complex instruments that few people understand their underlying value. Trading these complex securities made a lot of people rich, but it was wealth built on a house of cards. Government imposes building standards on houses for a reason...to keep them from crumbling to the ground and killing people. When did we stop believing in the wisdom of our founding fathers, and treat Wall Street bankers like angels?
Posted by LiberatedTiger on October 9, 2008 at 10:28 a.m. (Suggest removal)
I agree that education in responsible personal finances, financial literacy and investing/saving should be provided to all young people - and not necessarily by the parental units. After all, the mess we are in can be traced back to regular folks and our misuse of credit.
It could count as a Math course as interest compounding is a topic not understood or appreciated by many.
Posted by fourx5 on October 15, 2008 at 12:36 p.m. (Suggest removal)
pmmcarron, read this: http://yglesias.thinkprogress.org/archiv...
And if you can understand it, come back and tell me again how lending to minorities is the cause of this mess. Because it's an extremely tiny part of a large mess caused by plain and simple greed on Wall Street. Not the government, not F&F, not minorities. Rich white guys who couldn't get enough money were the prime cause of this mess.
Posted by pmccarron on October 17, 2008 at 1:15 p.m. (Suggest removal)
Your point is??? – never once did I mention the word "minority". Blame Democrats like yourself and the Democratic/Socialist Black Caucus (Maxine Waters, Gregory Meeks) for making this a race issue and insulting the Auditors that warned Fannie Mae was out of control. Basically accused the auditors of racism and how this would hurt minority lending. You are the ones (ACORN, Obama, Black Caucus) that made this a “minority” issue.
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