Republican Ideology Has Broken the Economy

There will always be a debate about the need and extent of regulation. This debate is healthy; it should prevent one side from pushing too far against the other.

However, as the financial system continues to experience a high amount of turmoil, it is clear that deregulation has exceeded the "too much of a burden on business" argument. Instead, too little regulation has broken the economy.

From the NY Times:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

That's right -- too much regulation will get in the way. We know how to manage risks now, so we don't need to stinkin rules.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of "best practices" and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

Wow -- a code of practices. That sounds like a good idea, doesn't it? Nevermind.....

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

"He never gave us a good reason, but he didn't want to do it," Mr. Gnaizda said last week. "He just wasn't interested."

Lenders were lying to people. LYING. They were MISREPRESENTING THINGS to people. But, yawn, so what.

The end result?

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry's excesses. Both the Fed and the Bush administration placed a higher priority on promoting "financial innovation" and what President Bush has called the "ownership society."

But wait -- there's more:

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

....

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Let's not even worry about predatory lending. That's not going to happen.

But when you give them what they want -- less regulation -- they screw up and come to the government hat in hand.

Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for "financial innovation."

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government -- now that it is in trouble.

Here's what bugs me to no end. I'm a capitalist through and through. I love buying and selling stuff. And frankly, I think most people do to.

But here's the problem. You have to have rules. Unchecked capitalism is a bad idea. That's what we've had. And it has failed.

Comments

[BilCon]

Hale, once again I find myself in the unusual place of both completely agreeing and completely disagreeing with you.

It is this statement that stands out to me.
"But when you give them what they want -- less regulation -- they screw up and come to the government hat in hand."
I believe that in order for capitalism to work, government must adopt a laissez faire attitude. Hands off!
If you want less regulation, fine, but when you fall and break both your legs don't come running to me. Suddenly, you would see industries start to self-regulate. Much of my disagreement with the current Congress is their stance on corporate welfare, both parties. Corporate welfare is just as addictive as Crack to businesses as it offers profits without risk.

[LeftRight]

Actually, if you allow no regulation, and then don't provide some sort of handout, there becomes no competition, and you end up in a world where we all buy from Walmart, since there are no other stores, and we all have AT&T, since there is no other phone company, and we all buy our cars from GM, since there is no other car manufacturer. When you have regulation the corporations are able to compete in a welcoming society, and the smaller startups will be able to compete with the larger ones, and there is no need for bailouts.

[surfcitysteven]

Problem, is when industry falls due to lack of regualtion, it often times hurts us first. In the form of e-coli in beef, in the form of lead in toys, and in the form risky loans that threaten to undue the whole economy. Laissez faire sounds really pretty, but it is very dangerous. Would you eat e-coli contaminated beef knowingly, and then when you get sick, praise the virtues of a hands-off government?

[LeftRight]

EXACTLY!

[PacificGatePost]

Rules absolutely have to be established and oversight is critical.

Here's an area eminently consquencial to our economic and political well-being that demands new approaches.

http://pacificgatepost.blogspot.com/2008/02/america-for-sale.html

The sooner we move to implement, the better.

[WASanford]

How many times do we have to go through this crap before we realize that IDEOLOGY does not work! Adam Smith's invisible hand is so invisible that it has almost no effect in a modern economy.

A long, long time ago I was an electrician working on traffic signals in So Cal. One of my co-workers had the ideology that all traffic signal problems were caused by a bad relay. So he solved all of his trouble calls by replacing all of the relays in the electrical cabinet. Needless to say, this was an intellectually dishonest and lazy approach to his job responsibilities. Sometimes the problem was somewhere else.

Rules? Yes; rules at least allow the players to know what to expect; but it takes more than that. The Fed chairman and his group are supposed to be watching America's economy with their toolboxes handy. Toolboxes? Yes they need to have something more at hand than just the ability to tinker with the interest rates that banks use for overnight borrowing. The ability to increase the reserve banks must hold against their loans might have stopped the current monetary crisis. Which is the result of our attempting to wall paper the whole world with our dollars so we all live off of our credit..

[mgloraine]

Your observations are correct, but now it's too late to do anything about it, since the supremacy of the corporate entity over any or all humans has been enshrined by BushCo in what used to be our Supreme Court.
George Warcrimes Bush has filled all available vacancies with partisan stooges who are guaranteed to find in favor of the highest briber, which is always the unscrupulous, bloated, corporate fat-cats. Justice for individual citizens in this country is now an impossibility, and any remnants of civil liberties for humans are on the verge of vanishing forever while John Roberts, Karl Rove, Dickless Cheney, and the whole Bush Crime Family demolish the Constitution and pocket the wealth of our nation to indulge in their personal gluttony.
Impeachment and life in jail with no parole for Bush, Cheney, Roberts, Rove, Rumsfeld, Gonzales, Addington, Yoo, George HW Bush, Jeb Bush, Neil Bush, Barbara Bush, Laura Bush, Jenna Bush, Sandra Day O'Connor, Nancy Reagan, David Petraeus, Eric Prince, Oliver North, Henry Kissinger, and the rest of the lousy stinking capitalist swine!

[Novista]

Here's the best 'autopsy' of the financial mess:

http://www.engdahl.oilgeopolitics.net/

It's a four-part analysis with plenty of colpability for the usual suspects.

[ErnestineBass]

Anarchy.

Look it up.

Okie dokie.

[TakeSake]

What's to worry about? It's just the "Invisible Hand" taking it's place in the market.

However, keep in mind that it's their invisible hand, manipulating the market to their advantage, wiping away true alternatives and competitors, while holding up the nepotists and embezzlers.

[duckfan00]

Look at Stan O'Neal from Merrill Lynch and his performance. He loses billions of dollars in the sub-prime market and Merrill stock value plummets. He gets rewarded with 161 million dollar buyout package. Two weeks later he is appointed to the Board of Directors of Alcoa. Like Bush though he is a Harvard MBA.

[knosiswar]

Hitting the Nail on the Head. I've been preaching that message for the last year, on this BLOG.

[Unrepentantliberal]

The problem is too many people believed Reagan and that "The magic of the marketplace will solve everything," crap. That was just a one hundred percent fairy tale. Whenever there are no rules and large sums of money involved, people will steal. It won't be a ghetto gang banger with a gun, it will be a white guy with a trophy wife, multiple huge mansions, a private jet and designer three piece suits.

Corporate welfare is still welfare. They just give it a better sounding name.

[joekonn]

Reagan never had a thought in his head....Ad­am Smith and, more recently Milton Friedman and Fredyrick Hayek, were the prophets of profit. Reagan was just selling (preaching) this 'new' religion.

Smith believed for the system to work a veritable priesthood was necessary, business men so moral as to never take unfair advantage. Well, surprise, surprise, business men and women are as ordinary as dust. There is nothing in the nature of business or business school that helps the soul to mature. Therefore, success is merely motivation, determination and talent (not to mention many with a good head $tart). So, rules are necessary to protect the players and the pawns.

Currently, guys like Romney have made millions erasing jobs, Gates by approaching monopoly, more than one ex president (senator, cabinet member, and so on) by helping his 'friends'. The necessary morality does not exist; so, Smith's conditions can not be met. That is why a mixed economy is essential, and why we need rules and a government willing to enforce them.

On the other hand, republicans are not alone in their blind faith. Some democrats are certainly weak on protecting the little guy from the sharks, and to fill their own pockets by making friends, bending rules and so on.

Stiglitz has a point, the war and its incredible costs have likely done more damage to the economy than the mortgage cheaters.

W sure has no hesitation spending money; he chose the most expensive solution possible. This is the thinking of a man who likely never had to budget his own money. The sons (and grand children and so on) of successful capitalists are poor choices to run any business or government, they just don't respect how difficult it is for most of us to make a buck. They erase jobs like Romney, putting working folks on the street, they start expensive wars putting generations in debt and young people in harms way.

I feel something warm and yellow trickling down on me.

[Rockyman]

"Unchecked Capitalism is a bad idea" because greed will corrupt ethics often. And the strong and powerful will take advantage of their leverage. Knowing this, laws can restrain the predatory nature from wreaking havoc. The Repugs like to forget greed and selfishness are still an ugly aspect of human nature. Materialism is humankind's God and if not checked by a more reasoned and balanced perspective, misery and depravation are the eventual outcome for many!

[HypocrisyAlarm]

Isn't this yet another example of how American business is damaging not only America, but the rest of the world. What economists call the "profit motive" is really just greed, and way too many in the business world are so in the cluthches of greed that they will stop at NOTHING at getting more and more and more.

Congress needs to repeal the laws that personify corporations and shield the heads of those corporations from responsibility for their decisions and actions and replace them with strict reporting and ethics laws. Further, any company that receives money from the people of the US in the form of their tax dollars should be forced to publish its accounting journal and general ledger on-line for the entire period in which it receives government money. If these companies are not under constant surveillance, they almost invariably cheat or at a minimum waste taxpayer money.

Every time one of these crises arises, we hear, "If we don't do a bailout, it'll hurt the economy." Perhaps, but it really hurts the investors most. They receive a large premium for risks that succeed and SHOULD ALSO take the burden of losses for those that fail but often do not. We saw it with the S&L bailout and the hedge fund bailout. Why should taxpayers foot the bill for failed investments in which thhey wer not involved and had no chance of reaping rewards?

Lastly, a corporation's obligations to its employees should have first priority in bankruptcies and liquidations. Those who have given their time and effort deserve better than to be left with little or nothing because some hotshot MBA has run a company into problems.

[Oldchef]

Indeed, if most of us lost money in a business, it would just be too bad for us, but if you are a wealthy banker, mortgage broker, hedge fund manager, Savings and Loan president, you can lie, cheat and steal, then demand the taxpayers bail you out when your schemes go bad. This crap never seems to change. These new twists on the old S&L schemes of overvaluing properties used as security for loans and then taking large bonuses and fees while the scams were working, then expecting bailouts is business as usual for these crooks. Corporations should be legally depersonified and corporate officers liable to suit.

[Rockyman]

The S&L "bailout" should have made it impossible to go down the same road. Yet, that is what we did. The lenders have a very short-memory when short-term profits beckon and bailouts for a correcting overheated market may be in the offing!

[Macready]

great blog . .. thank you . . . will anything be done . . . the next administration is going to have to do lots of regulating . . . the free market economy has never worked and will never work . . .

[Christian]

This is an argument we have been waiting for, a few big guys get to play money games and all us little working guys out here in the heart land get hurt from all directions. The owner, stock holders, bankers should take the loss and out of their own pockets two. They have been socking their options and bonuses away for the last few years, get some of it back. Good regulation should be a good political issue.

[PacificGatePost]

Mr. Stewart,

Great article, emphatic and clear. Reason has not prevailed. The Social impact of imbalance is resulting in this ... http://pacificgatepost.blogspot.com/2008/02/obama-social-phenomenon.html ...

A landslide carrying a candidate to the White House who evidences little experience or track record but presents well.