Consider one of the points made by the editor of a major publication of the Left (The Nation) recently writing in a major publication of the Right (the Wall Street Journal Editorial page, November 5: An Undeserved Win for the GOP) analyzing the Republican victory in the November 2010 mid-term election:
“By rescuing the big banks and failing to place demands on them, the White House economic team, led by Larry Summers and Tim Geithner, ceded populist energy to the tea party.”
Katrina vanden Heuvel is correct that many voters are opposed to the notion, begun under the Bush administration, of ‘too big to fail’ which leads to bailouts for the biggest established firms at the expense of everyone else (including smaller, more dynamic and innovative companies that might deliver better overall value to the public). But what does she mean by ‘failing to place demands on them’? Is she blind to the fact that the government has been increasingly (and inappropriately) over-regulating banks for decades now?
The Community Reinvestment Act of 1977 gave the federal government an unprecedented foothold in micromanaging the business practices of lenders, telling them to whom they should lend, how much and on what terms. In the 1990’s the power of this act were amplified, with banks having to establish racial and ethnic quotas, both in their lending and in their hiring practices, and ask permission before merging or opening new branches. In 1993 the Department of Housing and Urban Development (HUD) began suing banks over race-based statistical disparities. Banks were damned if they did (‘predatory lending’) and if they didn’t (‘redlining’, ‘disparate impact’). Above all, they were encouraged, as a Mafioso understands that term, to discard centuries of prudent lending standards and due diligence in favor of ‘affordable housing’ – a.k.a. sub-prime mortgages, ‘liar loans’ and flipping the risk to Fannie Mae, Fredie Mac and by extension, you and me the taxpayers.
All of this doesn’t qualify as ‘placing no demands’, and in fact contributed mightily to the mortgage market meltdown.
What demands would Ms. vanden Heuvel make on the banks? She answers that a few paragraphs later:
“If, as University of Massachusetts economist Robert Pollin and others argue, the single most important reason for the failure of economic recovery is that private credit markets are locked up, especially for small businesses, then the federal government could help by expanding existing federal loan guarantees by $300 billion. Meanwhile, excess cash reserves held by banks—now estimated at an unprecedented $1.1 trillion in Federal Reserve accounts—should be taxed an initial 1%-2%. Mr. Pollin estimates that this combination could generate about three million new jobs if it succeeds in pumping about $300 billion into productive investments. This plan should get bipartisan support.”