Tuesday, April 01, 2008

the bush administration and wall st. gets its way, again.

the bush administration’s new proposal for financial reform? creating the appearance of responding to the current housing and credit crisis, without actually doing anything substantive.

is there anyone left in this country, save for a few very rich republicans and investors that need further convincing that the U.S. financial system needs major reform. just what other bad news do we need to hear? the rescue/bailout (all at a bargain basement price to JP Morgan in just one weekend ) of bear stearns, in particular, was the federal reserve’s biggest single act since the depression. all this from a republican administration that is supposed to pride itself on fiscal responsiblity. ha!

speaking at the economic club of new york an exclusive, wealthy, largely homogenous group of top executives. president bush said this:

"It's important not to overcorrect, because when you overcorrect, you end up in a ditch," Bush said. "It's important to be steady."

what the federal reserve did was to tear up it’s own rule book, george, and in doing so offered up $30 billion of taxpayers money in the process. you call that steady? must be nice to help out a wall st. investment bank with somebody else's money (taxpayers).

a little economics history lesson:

traditional, deposit-taking banks (high street banks like bank of america, citi, etc.) have been regulated since the 1930s, because the experience of the great depression showed how bank failures can threaten the whole economy. supposedly, however, “non-depository” institutions (wall street investment banks) like bear stearns didn’t have to be regulated, because “market discipline” would ensure that they were run responsibly.

when push came to shove, however, the federal reserve didn’t dare let market discipline run its course. instead, it rushed to bear’s rescue, risking billions of taxpayer dollars, because it feared that the collapse of a major financial institution would endanger the financial system as a whole.

and if financial players like bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too. doesn’t that seem reasonable?

yet the bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. in fact, the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” that’s banker-speak for getting rid of regulations that annoy big financial operators.

even now, as the new proposal’s ink is still drying, industry lobbyists are lining up to oppose it. and to reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. and as we all know, this administration never, ever, admits that it made a mistake.

as if no further proof be needed that a poodle whose previous employer was goldman sachs (a wall street bank) sits at bush’s side, on monday, henry paulson, the treasury secretary, declares, “i do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

really? just what do you think it is fair or accurate to blame then.

according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. as for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.”

in other words, the people that has driven the bus full of homeowners into the ditch will be allowed to take corners as fast as they like again.

the administration, along with the treasury then, has learned nothing from the current crisis. yet it needs, as a political matter, to pretend to be doing something. how pathetically lame given that lack of coordination among regulatory agencies was an important factor in our current problems.

the various regulators actually did quite well at acting in a coordinated fashion. unfortunately, they coordinated in the wrong direction.

for example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. the occasion symbolized the shared determination of bush appointees to suspend adult supervision just as the financial industry was starting to run wild.

you might wonder how such a situation could have arisen in the first place.

i give you alan greenspan, the then federal reserve chairman. the roots of the foreclosure crisis can be traced to three deliberate decisions made by greenspan.

first, by reducing the federal funds rate to a mere 1 percent in 2003 and refusing to increase it for a year, greenspan and the federal reserve created the economic conditions for rampant investor speculation and a loosening of loan underwriting standards as lenders frantically competed for market share.

second, greenspan shunned increased regulations, even though he has now admitted knowing about abuses in the subprime loan industry. his failure to act has resulted in the mass use of the foreclosure, one of the most inefficient mechanisms in the market. not only is there a massive and total misery to families thrown out on the street, but foreclosures also carry with them massive societal costs, with lenders losing up to 50 percent of the loan value on each foreclosed home.

third, blinded by the irrational exuberance of surging home prices, greenspan promoted the non-traditional mortgages that have devastated so many homeowners. in a speech on feb. 23, 2004, greenspan stated consumers were paying too much for fixed-rate mortgages and asked lenders to provide "greater mortgage product alternatives to the traditional fixed-rate mortgage." when a person of greenspan's influence and stature promotes alternative mortgage products, lenders and consumers listen.

so if you want a start date for the beginning of this present crisis, i argue these three.

wall street followed greenspan's call and designed a whole range of risky, alternative adjustable rate mortgages, including those with low teaser rates that spiked after two to three years. these risky loans were sold - sometimes fraudulently - on a mass scale to a public ill-informed about
their significant risks. the regulatory system also allowed mortgage brokers to receive monetary incentives to place a borrower in a higher interest, adjustable-rate subprime loan even though the borrower would have qualified for a fixed-rate prime loan.

borrowers were also told that they would be able to refinance in a couple of years (now) when the rates shot up. they can't.

and for all those thinking of voting republican in november because of fiscal responsibility, just remember that the bush administration actively blocked state governments when they tried to protect families against predatory lending.

think of that when you next see a foreclosure sign…

because right now, as the fed has lowered the interest rates to banks, the cost of mortgages hasn't come down, and the banks are pocketing the difference in the loans the do make. and of those loans - only those with really good credit can even get a mortgage. so if you have one those adustable rate mortgages and you have less that a 600 credit score, the chances of you refinancing are currently very remote....

how's that for a system that doesn't need fixing?

remember what the secretary of the treasury, former chairman and chief executive officer of goldman sachs, said in his speech yesterday to america:

“i do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

... i say you're full of shit, henry paulson.

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