Wednesday, October 01, 2008

Misguided

Yesterday Representative Michele Bachman (R-MN) blamed the current financial crisis on the Clinton-era Community Reinvestment Act for pushing “homeownership as a way to open the door for blacks and other minorities to enter the middle class.”

It’s difficult to believe even someone as conservative as Rep. Bachman could believe such a baseless canard, let alone say it for public attribution in this, the Year of Their Lord 2008.

Everyone knows the mortgage crisis was caused by the legalization of gay marriage.

4 comments:

Runs With Scissors said...

You might find these Wall Street Journal articles infuriatingly interesting.

http://online.wsj.com/article/SB122298982558700341.html

http://online.wsj.com/article/SB122290574391296381.html?mod=article-outset-box

Having read these articles, many others, and relying on memory that becomes less trust worthy with time, I think it is naïve, or politically contrived to pin the blame on any individual, administration, or party. There is plenty of blame and demonstrated incompetence to go around.

I read one article that traced the roots of the current crisis to the Johnson administration. The author made the case that in order to get Fannie Mae and Freddie Mac off the federal books to support spending for the war in Vietnam, Johnson privatized both of these organizations. Because it was politically expedient to obfuscate the true relationship between the federal government and these mortgage corporations, the implication was let stand that they operated with the full backing of the Federal Reserve. While this was not true, the stock price of Fannie Mae and Freddie Mac soared on initial public offering because of the implied safety. This swelled the corporate coffers and entrenched a culture of inordinate risk and cavalier risk assessment.

Another article I read cited the Community Redevelopment Act of 1977 and the Carter administration as “ground zero” in the current fiasco. By law, these lending institutions were required to meet quotas on minority lending to borrowers that would not normally qualify. Again, it was implied that the Federal Government would cover any losses due to loan default. The program expanded to include not just minorities but all borrowers who would not ordinarily qualify for mortgage loans.

Yet another article blamed the Reagan administration for “deregulating” the mortgage industry. However, it does point out that this deregulation began during the Carter years. It goes on to say that the problem wasn’t that the industry was under-regulated, but that it was poorly regulated. Laws were enacted to meet political needs of elected officials of both parties that did not serve the public in the long run, but did serve the immediate political needs of the representatives.

More recently, I think you will remember two incidents that seem to have escaped wide publication. The first was the lost opportunity to mobilize the nation in the wake of 9/11 when President Bush advised the public that the best way to beat Al Quida was to “keep shopping.” That put the consumer credit lenders on notice to open the flood gates. The second was during a State of the Union Address. I can not remember exactly which one, but it was early in the Bush administration. The President voiced his goal that “all Americans should reap the benefits of home ownership.” Once again the signal was received loud and clear, not only by mortgage lenders, but by enabling politicians whose near term political goals coincided with the President’s vision, and once again we were off to the races.

I think all these instances can be grouped into two broad categories. The first is where the motivation is noble, but the logic is tragically flawed. The politician truly desires to better the lot of the electorate, but doesn’t understand the root issue. Home ownership is a sign of prosperity. If it becomes easier to obtain credit to buy a home, the owner becomes prosperous with the purchase of a house. Continuing that logic, if the government were to buy everyone a Lexus, Mercedes, or BMW, we’d all be considered “rich” and could afford higher taxes. This group proves once again the old axiom; “The road to hell is paved with good intentions.”

The second broad group is as dangerous as the first, but much more pernicious. They are the ones that see the Treasury as an extension of their campaign funds. They use the power of the pen to enact legislation that will direct common resources to benefit their constituency, and support their re-election. In effect, they buy your vote with my money, and visa-versa. This, unfortunately, has become the Washington way of doing business. The McCain-Feingold Act attempts to address this issue, but while trampling the Constitution under heel, misses the point. Because the bill did not address the root cause; there is so much money in politics because there is so much money in government, it serves as the “incumbent protection act” and does more harm than good. Once again, the road to hell…

The unfortunate part is that come January, none of this will change. McCain, while he preaches systemic change, is too impulsive to look beyond the surface and address root causes. He is a bull in a china shop, and he doesn’t mind bringing his own china shop. Obama sees change as implementing expanded policy and legislation, delivering more power into the hands of the very people who have brought us to this crisis, either through benign incompetence or malevolent self promotion.

In either case, I fear we will get the change promised. But we will find out that disaster is also a form of change.

Runs With Scissors said...

http://online.wsj.com/article/SB122298982558700341.html

http://online.wsj.com/article/SB122290574391296381.html?mod=article-outset-box

Having read these articles, many others, and relying on memory that becomes less trust worthy with time, I think it is naïve, or politically contrived to pin the blame on any individual, administration, or party. There is plenty of blame and demonstrated incompetence to go around.

I read one article that traced the roots of the current crisis to the Johnson administration. The author made the case that in order to get Fannie Mae and Freddie Mac off the federal books to support spending for the war in Vietnam, Johnson privatized both of these organizations. Because it was politically expedient to obfuscate the true relationship between the federal government and these mortgage corporations, the implication was let stand that they operated with the full backing of the Federal Reserve. While this was not true, the stock price of Fannie Mae and Freddie Mac soared on initial public offering because of the implied safety. This swelled the corporate coffers and entrenched a culture of inordinate risk and cavalier risk assessment.

Another article I read cited the Community Redevelopment Act of 1977 and the Carter administration as “ground zero” in the current fiasco. By law, these lending institutions were required to meet quotas on minority lending to borrowers that would not normally qualify. Again, it was implied that the Federal Government would cover any losses due to loan default. The program expanded to include not just minorities but all borrowers who would not ordinarily qualify for mortgage loans.

Yet another article blamed the Reagan administration for “deregulating” the mortgage industry. However, it does point out that this deregulation began during the Carter years. It goes on to say that the problem wasn’t that the industry was under-regulated, but that it was poorly regulated. Laws were enacted to meet political needs of elected officials of both parties that did not serve the public in the long run, but did serve the immediate political needs of the representatives.

More recently, I think you will remember two incidents that seem to have escaped wide publication. The first was the lost opportunity to mobilize the nation in the wake of 9/11 when President Bush advised the public that the best way to beat Al Quida was to “keep shopping.” That put the consumer credit lenders on notice to open the flood gates. The second was during a State of the Union Address. I can not remember exactly which one, but it was early in the Bush administration. The President voiced his goal that “all Americans should reap the benefits of home ownership.” Once again the signal was received loud and clear, not only by mortgage lenders, but by enabling politicians whose near term political goals coincided with the President’s vision, and once again we were off to the races.

I think all these instances can be grouped into two broad categories. The first is where the motivation is noble, but the logic is tragically flawed. The politician truly desires to better the lot of the electorate, but doesn’t understand the root issue. Home ownership is a sign of prosperity. If it becomes easier to obtain credit to buy a home, the owner becomes prosperous with the purchase of a house. Continuing that logic, if the government were to buy everyone a Lexus, Mercedes, or BMW, we’d all be considered “rich” and could afford higher taxes. This group proves once again the old axiom; “The road to hell is paved with good intentions.”

The second broad group is as dangerous as the first, but much more pernicious. They are the ones that see the Treasury as an extension of their campaign funds. They use the power of the pen to enact legislation that will direct common resources to benefit their constituency, and support their re-election. In effect, they buy your vote with my money, and visa-versa. This, unfortunately, has become the Washington way of doing business. The McCain-Feingold Act attempts to address this issue, but while trampling the Constitution under heel, misses the point. Because the bill did not address the root cause; there is so much money in politics because there is so much money in government, it serves as the “incumbent protection act” and does more harm than good. Once again, the road to hell…

The unfortunate part is that come January, none of this will change. McCain, while he preaches systemic change, is too impulsive to look beyond the surface and address root causes. He is a bull in a china shop, and he doesn’t mind bringing his own china shop. Obama sees change as implementing expanded policy and legislation, delivering more power into the hands of the very people who have brought us to this crisis, either through benign incompetence or malevolent self promotion.

In either case, I fear we will get the change promised. But we will find out that disaster is also a form of change.

Dana King said...

Well put; no question there is more than enough blame to go around.

The key lesson we need to learn is that allowing something as prone to excess as the financial industry to essentially self regulate is like asking Rosie O'Donnell to guard the dessert buffet. It wouldn't be so bad if the people who stood to lose were gambling with their own money. There are too many with little to gain who are losing too much, and there was little or nothing they could do about.

There's also the baby and the bathwater lesson. The fact that regulators fell down is not an argument for less regulation. (You didn't say that, but there are those who are.) That's like saying "my child got a bad education, therefore we should close all the schools." What we need is proper regulation, both in scope and efficiency.

Runs with Scissors said...

It is ludicrous to assume that the markets don’t need to be regulated in some fashion. The issue is how? Having Rosy O’Donnell guard the buffet line is one thing. Having Momma Cass supervisor her is another.

Look again at McCain-Feingold for illustration. It is bad law. It is, in my opinion, unconstitutional. And judging by how much both parties are spending on this election, it is ineffective. Also, look at Sarbaines-Oxely. I do not know the exact estimate, but that law has costs US companies billions of dollars, and put crippling constraints on small business, to the point that many start up companies just don’t start up. And yet, here we are with again in a situation that dwarfs Enron; exactly what that bill was to avoid.

When it comes to legislation, Congress lurches from one knee-jerk, know-nothing bill to the next. Laws are currently contrived to serve two purposes: The first is to fulfill the emotional need of the voting public in response to the cry “something should be done!” The second is to allow politicians to show that same voting public that “I’m fighting for you!” Neither is the basis reasoned legislation. Combine this with that arguable fact that most legislators have at best a surface deep knowledge of anything subject beyond re-election, and you have concocted a perfect storm of enthusiasm, self interest, and incompetence.

The Connecticut Compromise, defining the House of Representatives as elected by popular vote, and the Senate as appointed by the States, was to ensure that at least a part of the Legislative Branch was immune to the whims populist sentiment. It allowed for six year terms to permit Senators to take their time, carefully deliberate issues, and take the long term view of things. Six year terms, and appointment, also would, as Madison envisioned, allow Senators to represent the States as corporate entities within the Federal government, beholden to state legislators and not populace or party.

With, I believe it was the Eighteenth Amendment, that all changed. Now elected by the popular vote, the Senate has become just as partisan, just as responsive to the shifting whims of popular sentiment as the House, but they are harder to get rid of. If the founders could come back and look at what has been done, I am sure they would say, “No, that wasn’t what we had in mind at all.”

My fear is that those most recently described as “Masters of the Universe” will do no “perp walk” because it will be found imperfect law written by unknowing meddlers did not provide a means of prosecution. They will walk with billions that will enrage the voting public. In response, our elected representatives, in both houses, will smell the blood in the air as opportunity, lash together legislation to appease the masses. That legislation will again be a compendium of restriction on honest financiers that will stymie innovation and diligence, but will miss the root issue once again. Years from now there will be a new set of faces on TV, the economy will be in crisis once again, and the masses will be screaming for new laws, whether they are effective or not.

For once, I’d like to see Congress put together a panel of true experts in the field to craft the required regulations. People, who understand how the financial industry needs to work to meet the challenges of the 21st Century, yet are expert enough to close the loopholes that allow abuse of the system. For once I’d like to see them take their time and get it right, instead of charging around trying to get the credit.