Tuesday, 09.16.08
The Blame Game
Mario Tama/Getty Images
In times of crisis, financial reportage has a tendency to slip into the apocalyptic style of Old-Testament prophecy. "They shall cast their silver in the streets, and their gold shall be removed: their silver and their gold shall not be able to deliver them in the day of the wrath of the LORD: they shall not satisfy their souls, neither fill their bowels: because it is the stumbling block of their iniquity." Ezekiel could have been writing for a major financial paper during any of half a dozen panics over the last two decades. As it happens, I was doing technology work on a trading floor during the Asian meltdown in 1998, and I heard a young trader ask a grizzled veteran whether this was the worst crisis ever. The older man shrugged.
"They're all the worst ones when they're happening."
This insight has calmed me through several subsequent panics. But when an op-ed in this morning's New York Times called the possibility of an AIG liquidation "as close to an extinction-level event as the financial markets have seen since the Great Depression," it wasn't hyperbole; it was a statement of fact. The world's largest insurer has its tendrils planted in every corner of the financial world, including insuring the remaining solvent financial institutions against defaulting mortgage bonds. A failure would send those institutions scrambling for new cover, while dumping billions of dollars of assets into already depressed markets. This, in turn, would weaken balance sheets, possibly pushing other institutions along the footsteps of Lehman and Merrill Lynch.
Naturally, the two presidential candidates are moving quickly to deal with this crisis -- that is, to blame it on everyone except themselves. John McCain and his surrogates are pushing the dubious notion that the primary problem is a lack of transparency and accountability. He might send someone down to Lehman's trading floor to ask the people packing up their desks whether they feel they've gotten away with something.
Meanwhile, Barack Obama is pointing the finger at John McCain, or at least Senator McCain's ideas:
The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.
I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to.
This may play well on television, but it is rather disappointing coming from the man who promised us a new kind of politics. There have been no significant changes to the financial regulations in the last eight years that might credibly have created this crisis (the one major alteration, Sarbanes-Oxley, moved things in the other direction). And it's hard to blame loosened oversight when the entire market systematically overvalued the now-toxic securities. Lehman Brothers was not, after all, trying to put itself into receivership for the sheer joy of molesting taxpayers. The SEC is an extremely valuable agency, but even its crack regulators are not omniscient demigods who can instantly divine the "true" price of a complex security. Nor does it make sense to blame overpaid CEOs. Rick Wagoner's millions may be ill-deserved, but they did not force his customers to take out unreasonably large bank loans, nor compel investment managers to buy the securities into which those loans were packaged.
But both candidates are right about one thing: America's financial regulatory structure is badly outdated, and in need of a massive overhaul. Its overlapping agencies seem to work at cross-purposes as often as they cooperate, and the fuzzy lines of authority can exacerbate panic because of a lack of any clear procedure for wrapping up big insolvencies. And its inertia in the face of changing markets has left it ill-prepared to deal with the current crisis. The SEC, for example, continued the process of forcing securities issuers to use a few government-sanctioned ratings agencies to certify their securities, despite mounting evidence that this cozy oligopoly was falling down on the job. As with most regulations, the quality floor quickly became a ceiling, as issuers did just enough to get approval.
More broadly, all of the regulatory bodies failed to realize, or react to, the fact that an increasingly complex array of financial instruments had introduced new risks into the financial system. It is far from clear that these risks should have been avoided by banning the more exotic derivative structures, as some commentators have urged. But the risks should have been known.
America's entire approach to regulation is a relic of the New Deal, when optimistic Keynesians still believed that they might tame the economy by getting bright technocrats to run it. Seventy-five years later, we know that an economy of 300 million people is too complex to be controlled by any institutions, no matter how well-intentioned or well-managed. But our regulatory bodies still function on the dream that we can find bright public servants to wring all of the risk out of the system by carefully inspecting each product and certifying its quality.
A better approach would be to focus less on eliminating risk, and more on managing it. This means not only greater transparency, but encouraging alternate ratings systems to help make investors aware of risk. It also means developing procedures to cope with the inevitable failures, rather than scrambling to put together ad-hoc solutions when the market, shockingly, once again fails to behave.
But it is probable that instead of better regulation, we will simply get more of it. Regulatory institutions are hard to replace; over time they develop strong constituencies in both their employees and the institutions they regulate -- institutions that would rather deal with the devil they know, especially since the devil they know often functions as a barrier to entry for newer, smaller firms that might grow into real competition. Real reform -- in the original sense of remaking the institutions into a better form -- seems unlikely. Rather more certain is that down the road, some other financial crisis will take the beefed up bodies by surprise.
Paulson's marching ordersThe Wall Street Journal discusses Paulson's decision to eschew a government bailout of Lehman Brothers. |
Out from the shadowPaul Krugman argues the Lehman collapse exposed the uncertainties of the "shadow banking system" and the shortcomings of the Fed's regulatory system. |
The candidates' takesThe New York Times explains the presidential candidates' positions on Wall Street regulation. |
The broker-dealer's demiseAccording to the Financial Times, Sunday's financial meltdown marked "the last gasp of the independent investment bank." |
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This makes too much sense, clearly you will be forbidden from talking this way on TV or radio since we in the public may not hear that the perfect world will never exist.
"There have been no significant changes to the financial regulations in the last eight years that might credibly have created this crisis."
I think the Commodity Futures Modernization Act - the deregulation of swaps that McCain's chief financial adviser Phil Gramm helped push through Congress 8 years ago - may qualify. The fact that it was not even mentioned here, but Sarbanes-Oxley was, is baffling.
TODAY IS A NEW DAY
John McCain is starting to ramp it up - his rhetoric that is, on this subject, and he is doing fine, thank you.
One only need go to the website of JohnMcCain.com, hit (Issues) at the top of the main site page, go to (Economic Plan), and one can delve into specific discussions of his plans for job creation, bringing order to our Federal Budget, etc., and doing it now!
Our economy is in desperate need of going in a new direction. With a total national debt of some nine trillion dollars, all America understands we need to go in a new and different direction, and we need to start yesterday. John McCain understands that and agrees.
There are some comments circulating around in certain media that have been rightfully attributed to the position of certain people in the Republican Party of the past, and I am delighted these are being brought forward so we all can correct these incorrect views, and obviously do it immediately. Mr. McCain has started to do so, telling us more about his plans on this, and speaking with intensity.
To continue, I ask readers to start digging into the following source material. There is a lot to go through here; but it is necessary. Work with me please.
(1)(If You Like The Michigan Economy, You will Love Obamas), Phil Gramm and Mike Solon, Wall Street Journal, 9/13/2008
(2)(Obama Agenda May Not Add Up), Peter Nicholas, July 8, 2008, Los Angeles Times
(3)(Shaky Economy Challenges Ambitious Obama Agenda), Bob Davis and T.W. Farnam, Wall Street Journal, 8/26/2008
(4)(Obama Gloomy Big-Government Vision), Lawrence Kudlow, Real Clear Politics.com, February 15, 2008
(5)(Obama and McCain Have Big Economic Differences), Martin Crutsinger, AP, 9/8/2008
(6)(Obama Altitude Sickness), Charles Krauthammer, Washington Post, September 12, 2008
I realize I am suggesting a lot of reading. I did it this past weekend.
For all the above reasons in this source material, and many others, I am voting for the Senator John McCain/Governor Sarah Palin ticket at the top, and then for all Democratic Party candidates for Congress.
I feel our Congress in Washington has been doing the absolutely best they could.
The problem has been the incompetent buffoon at 1600 Pennsylvania Avenue, and now with our economy teetering, Mr. Bush still does not get it. It was his self serving policies and programs involving gross deceit all along the way that he forced down our throats that caused all this.
And you will see from the above references, Mr. Obama does not get it either. He would only make things worse.
John McCain and Sarah Palin do get it, understand our country, know how to work across party lines, and I am convinced they are the best choice at the top of the ticket.
I ask all Americans to agree.
Megan,
You are in wankerific territory here.
The discussion starts with the Commodity Futures Modernization Act. To not mention it is nearly criminal.
Anyone at this point who is leary about excess oversight is still living in 1991. Newt came to town and set the ground work for Jr/Cheney/Delay et al to do away with all of our oversight.
If we had any adults running the show we wouldn't be in this mess. And you my dear are culpable for trying to paper over the ugly reality. This disaster is the consequence of failed republican philosophy. If they didn't work so hard to rabidly smash holes in the dyke there wouldn't be a flood.
It's long past time to look at the psychology and blatant dishonesty that drove the Norquists and Roves to seize control of this country and try to wreck it for a fast buck.
We have an ugly crazy rabid dog in the middle of our political process, and you fools in the media have been trying to pretend it doesn't exist.
You all need to unmask the Republican beast, before we are living in a banana republic.
CommonSense12 is either a paid troll or a lunatic. Either way the laundering of republican bullshit has to stop.
I agree with jason. How can you not bring up the Commodity Futures Modernization Act?
This is interesting:
Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm's wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.
To CommonSense12: I appreciated your comments although I don't completely agree with them. I have begun reading your suggestions. There seems to be quite a diversity of outlets that you have quoted. I particularly appreciate your advice to do some research before formulating opinions. Whatever one believes, there isn't a need for name-calling; plenty of evidence out there that this practice doesn't add anything of value to the conversation.
Whether or not the column is right about the plausibility of a Keynesian approach, it's totally wrong or at least glossing over considerable controversy about changing regulation, and does not do justice to Obama's position.
Fannie Mae and Freddie Mac were privatized in the 1960's, but were created in the New Deal era as government institutions.
The Glass-Steagall Act was repealed in the late 90's, allowing companies to underwrite and trade mortgage-backed securities. This facilitated, whether or not it caused, speculation in the housing bubble.
Greenspan sat on really low rates for a really long time. This inarguably caused a financial bubble.
Even though it didn't pass, Bush wanted to privatize Social Security. Wouldn't that have been a jolly proposition, considering our current financial crisis? AIG, a major retirement-annuities service provider, had to be bailed out by the Federal government.
In short, there are a whole lot of regulatory changes that Obama could make. Whether they're all good propositions, they definitely add to up to sleeping at the wheel.
This writer has no business writing a column on economic issues. OK, no major changes to the financial structure in the last eight years, perhaps. But the repeal of major portions of the Glass-Steagall Act in 1999 along with the Commodity Futures Modernization Act, as well as weakening many of these laws and regulations throughout the 80s and 90s, played a major part of this. While perhaps Obama can be faulting for putting it on McCain's shoulders, as the deregulation was highly bipartisan, the deregulation of markets led directly to the mass collapse we are seeing today. Keep in mind, Clinton signed both the Commodity Futures Modernization Act and the Gramm-Leach-Bliley Act. It's not a coincidence that shortly after repealing laws put in place from lessons learned during the Great Depression, we have a similar collapse of our financial markets. That "invisible hand" that free marketeers cherish just smacked us in the face.
I hate to break up the butt kissing session but while your piece has some sensibility it is also the sort of vague rhetoric that anyone can put. You call for more transparency. That's great but unless there is a specific idea it means nothing.
Here is a great nugget
"It also means developing procedures to cope with the inevitable failures, rather than scrambling to put together ad-hoc solutions when the market, shockingly, once again fails to behave."
Duh, except, exactly what procedures do you suggest. These aren't solutions. These are hopes. Hopes that you clearly hope someone else can fill in the details for. Anyone can dream up anything this vague.
Are you kidding me! The seeds for this economic debacle were sewn by our good friend Bill Clinton who brought deregulation to our financial markets with the repeal of The Glass/Stegak Act thus blurring the lines between commercial banks, investment banks and insurance companies. Add to this, the policies of Clinton which lead to the lowering of standards required to qualify for a home mortgage by Fannnie and Freddie and you have what is referred to today as the houisng crisis i.e. people who had no business getting a mortgage got one and discovered they couldn't pay it back after the fact. Don't forget Fannie and Freddie were run by former Clinton White House officials, who reaped millions for their efforts which lead to the government bailout of these agencies. How can Nancy Pelosi and Obama claim they as a party have no blame with regard to our cuurent state of affairs. The American peolple know better!
Which party has made deregulation its mantra? I seem to recall it has been the Republicans. Who is more likley to develop a system for regulating all the new forms of investment: people who believe in regulation or people who don't.
We are at a watershed. It will no longer be possible to pretend that deregulation and low taxes will solve every financial problem.
You over complicate things. If you had simple rules for getting a mortgage for a house (adequate job, money down) this wouldn't have happened.
At a time like this, what we need is a steady hand to guide the country through. The last thing we need is someone like Obama and Biden who keep yelling fire in a crowded theater. What they are doing is totally irresponsible, calculated for political advantage, and stoking panic. They obviously have a problem rising above the nasty rhetoric. How unpresidential!!!
I am an independent and have not made a decision how to vote. However, I am not at all impressed with the way Team Obama-Biden have been behaving during the last three weeks. It reeks total desperation and make them appear like two little kids throwing bad tantrums. Their demeanor has contradicted with the message of "hope" that Obama has been preaching to the country. It now appears that as he sunk in the polls, his true colors began to show.
As Roosevelt said during WWII, we have nothing to fear but fear itself. Our country now needs someone with the right temperament and steadiness to guide us through the difficult times... not two little kids running around and tearing down our institutions.
The following is from a NY Times artiel published recently. In a nutshell it shows how the problems that have now spread throughout our financial system were recognized early on at Fannie and Freddie but they were being forced by DEmocratic legislators to take on MORE POOR QUALITY LOANS!!! I'd note that Bush tried yearly from 2003 on to get authority to more fully regulate fannie and Freddy and was blocked by Dodd and Barney Frank and the rest of the Democrat crew now screaming about the failure to regulate. Ain't life grand? The money quote is
"Once, a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source."
In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”
Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document.
But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher.
“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans.
Mr. Syron contends his options were limited.
“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”
But when housing prices began declining in 2006, choices at Freddie Mac and Fannie Mae proved disastrous. Stock prices at both companies have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value.
More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis.
Mr. Syron and the Fannie Mae chief executive, Daniel H. Mudd, defended their choices, saying in interviews that they did not anticipate that the housing market would decline so quickly and that they were buffeted by conflicting pressures.
“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview.
Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing. In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans. Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.
The only real protection against such a downfall was purchasing only the safest loans.
However, the companies were constantly under pressure to buy riskier mortgages. Once, a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source. Shareholders attacked the executives for missing profitable opportunities by being too cautious.
Mr. Syron and Mr. Mudd eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.
“The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them,” Mr. Andrukonis said. “Everybody understood that at some level the company was putting taxpayers at risk.”
Mr. Andrukonis wrote his memo in 2004. At the time, he also briefed the risk oversight committee of the board of directors, but did not share his memo with them, he said. A member of that committee declined to return phone calls.
Soon thereafter, Freddie Mac’s head of capital compliance and oversight, Donald Solberg, counseled Mr. Syron to maintain a thick capital cushion, according to multiple people familiar with those discussions. Mr. Solberg continued making that recommendation until early 2007, when he left the company. Mr. Solberg declined to comment on his conversations.
“It basically worked exactly as everyone expected — when things got bad, the government came to the rescue,” said a second former high-ranking Freddie Mac executive. “But we didn’t expect it would come at the cost of a new regulator who now has the power to burrow into our business forever.”
Isn't it weird how the drooling Bush haters keep trying to tie the current housing and financial crises to Republicans when it was Clinton who signed the Commodity Futures Modernization Act and the Federal Reserve who created the policy of cheap credit and liberal-inspired easy loans to those who can't afford them, which led right to the resulting crash of the housing market and its ripple effects on the rest of the economy. Why is it these morons blame Bush and McCain for the current situation but the Dems never blamed Clinton for the dot com bust that happened on his watch and the devastation it has wreaked on our econonmy for the last eight years.
And why do they keep calling Fannie and Freddie private institutions? They're federally chartered corporations with monopoly privileges and taxpayer financed guarantees. They're about as "private" as the Post Office.
Who's to blame? What's to be done? Oh me, oh my...
Please.
Nobody in the financial services industry is bothering to take any blame for any of this themselves. It's (fill in the blank)'s fault. We've got to do something about all of that. Blah, blah, blah.
GREED KILLS. Profit is wonderful, free markets are essential, and excess regulation is STUPID. But GREED KILLS. And when greed rears up and takes a swipe at things, there should be only ONE response--LET THOSE WHO DESERVE TO DIE BE LOST.
The only truly ridiculous thing in this whole mess is that the American taxpayer is having to bear the brunt of it all because nobody has the cojones to LET THESE INSTITUTIONS FAIL. These markets should be permitted to collapse back to ground zero, if necessary, and some greedy souls can venture into bankruptcy--then we can START BACK UP FROM SCRATCH...lessons learned and all that. Some "innocents" will go down with that ship, to be sure--but we'll emerge a stronger nation in the long run and my young daughter won't be having to pay for this mess when she should be worrying about HER future, not OUR past.
Wow, so in 2004 the Republicans had control of the presidency, the House, and the Senate...but the Democrats somehow had control of Freddie Mac. And here I though we had smart CEOs in this country. I guess that settles it, China now officially does everything related to business, top to bottom, better than us.
By the way, David, both the Commodity Futures Modernization Act and the repeal of the Glass-Steagall Act were sponsored by Republicans, namely McCain's former financial adviser. Both parties are guilty, so I wonder why you refuse to implicate your own party. BOTH PARTIES ARE IN BED WITH MARKET "LIBERALIZATION"! That's why I refuse both. As for the dot com bust, it may have had it's groundwork laid with Clinton, but it officially burst on Bush's watch.
While McCain's plan is better than Obama's neither one goes far enough.
www.nevadapundit.wordpress.com/2008/09/18/is-it-the-economy-or-the-government-that-is-broken/
All of us armature economists seem to have the answer. Well, mjtimber has it right in my opinion. Repeal of Glass Steagall was also tied in with the Community Reinvestment Act of 1977. An act that actually created what we know as Sub Prime Loans by Prez Jimmy Carter. The Glass Steagall was an act passed in 1933 by FDR admin. because the commercial banks were also working as security brokers. Because there was so much fraud involved with this they were the direct cause of the Bank Collapse of 1933. Glass-Steagall was enacted to prevent this. But, it was replaced by the Financial Modernization Act in 1991 which gave us Citicorp, the merger between Travelers and Ctitgroup. This legislation was only able to be passed when Senator Phil Gramm (R-TX) compromised with Bill Clinton on expansion of the CRA, therefore creating a market for greater access to the sub prime loans and a venue for their distribution. Hop ahead to 2003, with the Liberals in Conservative clothing, who occupied the White House and the Congress at the time. They passed the American Dream Downpayment Act and the Zero Downpayment Act, both liberalized giveaway programs wrapped in a veil of free market thinking. Hence, I give you the Sub Prime Bust.
Treasury knew that mortgage loan fraud was on the rise way back in 2005. There was a 1400% rise in suspicious activity reports on mortgages.
http://www.fincen.gov/news_room/rp/reports/pdf/MortgageLoanFraud.pdf
This is signal is equivalent to the August 6, 2001 Presidential Daily Briefing, Osama bin Laden Determined To Strike in US, except this one should say, Valuations of CDOs is in Doubt
The response of the Bush Administration once again is reactionary. The actions taken by the SEC today should have been taken 3 years ago. Yet, the Bush Administration continue to starve the SEC's budget.
Let me guess he'll propose a new Director of National Finance to coordinate all the financial information among agencies. Its a whole new agency to do what the SEC can do if they have an ADEQUATE budget. You don't need an MBA to figure that out.
I think one issue that more taxpayers need to know about is the "crowding effect." This is the theory that the larger the Federal Debt gets, the more it "crowds," other investments. This can put a damper on the economy. McCain wants to just our debt by 4.2 Billion during his first term. Obama wants to jump it by 2.9 Billion. Both of those numbers are based on their tax and spending proposals, assuming the economy doesn't change (aka GIGO), but they show the direction each sees for the economy. When you see where the money goes, it is more clear. McCain will save the very wealthy a lot on Taxes, Obama will save the middle class a lot on taxes, and spend money on infrastructure (which is a bad word to republicans)
Commonsense12 suggests a right-tilted reading list of commentators, but why not go right to the words of the candidate he supports, John McCain, who says of health care:
"Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."
Yes, McCain thinks our banking system is a model to be emulated by health care. It's in the American Academy of Actuaries journal "Contingencies": http://www.contingencies.org/
The elderly McCain falls back on the only thing he has known and felt comfortable with for decades, deregulation as a panacea for every societal problem - unless, of course, it involves a way to legislate compliance with evangelical values. The new McCain is a scary amalgam of the do and say anything to get elected politician he long claimed to despise and the old warrior with only a few unremarkable arrows in his quiver. If he dies in office, Palin, an intellectual lightweight, will be so far out of her depth that we might as well just sit back and enjoy our elevator ride to third world status. She will never surround herself with the kind of advisers who will understand how to parse empirical data and formulate rational responses. Instead, she will cling to dogma, reinforcing her decisions with sycophants and toadies.
As complex as the market is, at least Obama admits that there is more to the problem than blaming individuals and trying to put lipstick on the legacy of Phil Gramm, McCain's deregulatory altar boy.
The old rules to get a home mortgage used to be 10% down and monthly payments (principal, interest and taxes) not to exceed 28% of family income. This conservative system worked for decades after WWII and it was a de facto form of regulation. I haven't done the research to know which entity instituted it (was it the S&L regulators, the insurers, the Fed, HUD, Fannie or Freddie?).
Perhaps these rules changed longer ago than the last 8 years, but it is criminal for fiduciary institutions and regulators to not have responded to ruthless and irresponsible lending. I hold the people in charge responsible for their action or inaction.
One need not "blame the overpaid CEOs" but one can blame the system that allows outrageous short term windfalls and thereby encourages the short term view.
This is related to the root problem of our addiction to short term returns, whether it be equity valuation or commission-based salaries. All those folks who closed on the risky loans got out with their bonuses and it's too late to get it back.
The purpose of regulation is sometimes to prevent people from "getting away with something" but often it's to create appropriate ground rules and structure markets to achieve long term goals. This is what colleagues and I are trying to do in the area of carbon credit trading (I'm an engineer, not an economist). How you set up the system makes a big difference.
With regard to concentration of power (AIG), antitrust regulation exists in part is to prevent predation, but also to reduce risk to the overall economy by preventing too much power from accumulating in the hands of one institution. Where was this oversight?
The climate of the past eight years most certainly made a difference in how regulators behaved. But the problems run deeper than that and so the solutions must be longer lived than the next administration. About this, Megan and I likely agree.
As with all government run/regulated enterprises, it's not just the regulation (or lack of it) nearly as much as it is the REGULATORS in charge. All these SOB's game the systems to their advantage and, to find the culprits, follow the money. The higher ups at Fannie & Freddie were warned in 1997 that their buying of high-risk loans would be disasterous. In 2003 (9/11/2003 prophetically) GW Bush proposed tighter regulation of Fannie & Freddie (NY Times story) proposing a NEW agency to oversee them, only to be shot down by Chri$ Dodd and Barney Frank. In 2005 McCain co-sponsored S190 - the "Federal Housing Enterprise Regulatory Reform Act of 2005", again to be shot down by Dodd in the Senate and vociferously opposed bt Frank in the House. McCain warned of the Fannie & Freddie meltdowns if nothing was done. And nothing was. Who profited? Clinton OMB Director Franklin Raines ran Fannie and "earned" $90+ MILLION in 6 years bolstering his stock options buying bad loans and padding Fannies protfolio. Then Jim Johnson scored $100+ Million following in Raines' footsteps before going to Lehman Bros. to run them into the ground while scoring more $Millions. Under their reign Fannie & Freddie sent hundreds of thousands of OUR dollars to the election campaigns of Dodd, Frank and Obama. Johnson and Raines are now economic advisors for the Obama campaign and Johnson headed up Obama's VP selection committee. Even former Clintonista and 9/11 committee cover-up specialist Jamie Gorelic scored over $75 Million from "investments" in Fannie and Freddie, using her cozy relationships with Raines and Johnson. The interim Fannie successor, Daniel Mudd, made $43 Million in TWO years running F & F into its grave while praising the (100% Democrat) Congressional Black Caucus in 2005 for being "the conscience of the country as well as Fannie Mae and Freddie Mac" during his confirmation hearing. So, go ahead and blame Bush and McCain - the only ones calling for fixes - or Phil Gramm - who even Clinton Treasury Secretary Robert Rubin said had NOTHING TO DO with the current debacle. Keep covering for Democrat Obamanistas Raines, Johnson, Mudd, Barney Frank, Chris Dodd, Gorelic, et al. See where THAT gets us!
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This makes too much sense, clearly you will be forbidden from talking this way on TV or radio since we in the pubilc may not hear that the perfect world will never exist.
Posted by robert verdi | September 17, 2008 4:07 PM