Bulls, Bears and Bailouts

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As for preventing another collapse, Fannie Mae and Freddie Mac — the “government-sponsored entities” primarily responsible for the housing meltdown — are now completely taken over by government. They own or guarantee 40 percent of the country’s mortgages — which they bought from institutions, repackaged and then resold, with an implicit guarantee by the federal government against default.

The Community Reinvestment Act mandated lenders to grant loans to otherwise unqualified buyers. It remains on the books. And the Federal Housing Administration continues to back loans taken out by home purchasers who otherwise would not and should not be able to purchase homes.

Wall Street can therefore continue to pass along the damage done by its risky behavior to the taxpayers. It fulfilled its version of the Hippocratic oath: Congress, do us no harm. The regulations prevent no practice that a few sharp accountants, lawyers and traders haven’t already figured a way around.

The Democratic spokeswoman asserted that “it’s no secret the big banks were against (the regulations).” Really? The proposed regulations preserve the options for bailouts of institutions considered “too big to fail.” And some firms are bigger now than ever. Reason Foundation’s Nick Gillespie says: “One of the major reasons why financial institutions played Russian roulette with the economy was because they were betting they would get bailed out. Which is precisely what happened. The new rules codify the idea that the government will make sure certain institutions can never fail. And if you think the big boys won’t game that system, then you don’t understand how well Citigroup, Goldman Sachs and others have come through the current meltdown.”

How do the new regulations hamper Wall Street? Regulations, in general, tend to fight yesterday’s war. Financial services, like everything else in this digital age, are in a constant state of innovation and reinvention. The new regulations will induce new financial products and new ways of doing business unanticipated — if not caused — by Congress in its attempt to “rein in bad practices.”

To reduce the possibility of a future meltdown, Congress could have forced the players to play with their own money by shutting the escape hatch of government guarantees and bailouts. It did not. Pass the Champagne.

Larry Elder is a syndicated radio talk show host and best-selling author. His latest book, “What’s Race Got to Do with It?” is available now. To find out more about Larry Elder, visit his Web page at www.WeveGotACountryToSave.com.

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  • JasonPappas

    Sad but true.

    One tends to see the CEOs and upper management supporting Democrats because they like the fact that regulations help prevent competition and subsidize risk taking. The middle level employees live with the rules but would rather be free to rise or fall on their merit. These are the guys on the trading floor that yelled: give us a 2nd Tea Party!.

    There's Wall Street and there's Wall Street. Goldman Sachs is called Government Sachs because of its reliance on Washington to bail it out. And its CEOs often get Washington jobs in both Republican and Democratic administrations: Robert Rubin (Clinton), Hank Paulson (Bush), etc. It was basically Democratic Congressmen who rushed to bailout the banks based on Paulson's faulty intel. Republicans stopped it on the first vote it before caving.

    The banks didn't adequately price risk before the bailout. They certainly won't now. What these institutions do is a simple calculation using historical price movements. Since the government protected counter-parties, the calculations won't price such risks–the events didn't happen. Counter-party risk won't reflect true dangers. The CEOs will continue business as usual. An even bigger blow-up will occur in the future.

    • Jim C.

      Big government costs big money. And in a way, that big money requires big government.

      When times are good, who cares? I got mine. But when times are bad the electorate will favor liberals who promise to beat up on the fat cats. This is of course a distortion of what needs to happen, but it plays well in Peoria.

      I could see conservatives getting a leg up, however, if they could articulate a positive libertarian vision. To do so effectively, however, they would need the right candidate, first of all, and second of all, need to be able to explain how their alternative would work.

      Because the way it works now, the "small government"-types who take office enjoy that seat of power, go along with regulations that help their buddies, and get rid of regulations that hamper their buddies–all the while advocating "tort reform" (disadvantaging individuals) and speaking out against trial lawyers–the very group that would stand in lieu of government nannyism.

      The message is too mixed.

      • http://intensedebate.com/people/JasonPappas JasonPappas

        I care. I care how I make a living.

        That's the point. Until and unless people are concerned about earning one's keep in an honorable manner, fighting over the spoils will destroy our republic. The key isn't a better understanding of economics; it's a better understanding of virtue.

        The moral hazards of bailouts encourage recklessness, failure, and greater bailouts. We must face the consequences of our actions and live responsibly.

        The lesson must be stated in ethical terms. I was aware I didn't do that in the original post. Thus, I thank you for provoking me to make a better point. That's what you were trying to do, wasn't it? ;)

  • USMCSniper

    Andrew Breitbart understands this well. "What is really wrong with the banking industry and what is it going to take to fix it? What is the real cause of the so called “meltdown”? Ponder these questions deeply and then seek out honest answers. Prepare yourselves for the facts you will be faced with and what those facts mean. Political correctness need not apply for this job because actual correctness, absent that qualifier, is required. As Tim Geitner tries to offer every explanation besides the real one concerning AIG, maybe there exists at least one courageous elected official who will ask him directly to explain Grameen banking, microfinancing and how the progressives drove the American Economy into the ground by bowing the American’s economy to Islamic law via the guise of political correctness known in the form of “environmentalism” and “social justice.” Are those Fightin’ words? Yep, that is one thing that happens when a nation is engaged in war and Patriots actually fight back with the most powerful weapon that ever existed. Truth.

  • Len Powder

    There is a class never mentioned by Marx or sociologists. It is the class of the corrupt. It consists of high-ranking government officials and wealthy Wall Street executives (amongst others). It is this CLASS, not the bourgeousie that Lenin and Castro demonized, which is the enemy of the proletariat and the middle class. The Class of the Corrupt is not written about or analyzed only because no Sociology Professor has yet recognized them but it exists like the ground you walk on and it is destroying America very quickly.

  • dan o'hanlan

    This current administration's "solutions" to real problems are based on a misunderstanding of the causes of the problem, and a fix that doesn't challenge their ideology or their friends.