So we’ve slapped an ill-conceived and pork-laden bailout bandage onto the current economic crisis.
But that’s all it is: A bandage. This bailout bandage contains no solutions for the fundamental problems that led to the current crisis. It’s the functional equivalent of pulling over a drunk driver, taking away the bottle of rum he’s clutching in his right hand, and then giving him back the car keys.
So the next step must be to address the fundamental failures that led to this crisis. It’s the only way to prevent another.
(1) The lack of regulation that allowed unfettered greed to flourish on Wall Street must be addressed. This means re-instituting the regulations that have been obliterated by the last thirty years of bankrupt Republican strategy — a strategy based entirely upon the facilitation of greed.
(2) The bad mortgages lying at the heart of the current crisis must be alleviated. Main Street has been guilty of making some bad decisions in its own right, but the middle class has also been victimized by predatory lending practices.
This means that bad mortgages held by homeowners (not speculators) need to be re-structured to ensure reasonable and consistent monthly payments. Barack Obama has proposed giving bankruptcy judges the power to restructure these bad mortages, but in my opinion that’s not good enough: If we see these people hurtling towards the cliff of financial ruination, we shouldn’t wait for them to go over it before trying to pull them back up.
And this also can’t be an effort limited to just bailing out those currently in trouble. It also means regulating the mortgage industry so that these types of bad mortgages can no longer be created. For example, adjustable rate mortgages were legalized in the same legislation that led to the Savings & Loan crisis.
(3) We can no longer slave our economy to the fate of a small handful of companies. Senator Bernie Sanders says that “if they’re too big to fail, then they’re too big to exist”.
Unfortunately, in the wake of the current crisis, we have actually exacerbated this problem instead of alleviating it. Mergers of the largest banks have resulted in even larger banks. This solves a short-term problem, but we’ve simply replaced it with a bigger problem down the road.
The current crisis clearly demonstrates the truism that, the larger they are, the harder they fall. These large institutions, on which our economy is apparently completely dependent, must be broken up into smaller entities. We shouldn’t be keeping all of our eggs in one basket.
(4) A happy balance must be found in regards to mark-to-market accounting rules. These rules (requiring that the value of assets be set to their current market value) were put in place as a direct result of Enron’s abuse and downfall. The problem is that they tend to exacerbate downward spirals, particularly when applied to long-term assets, by creating and then reinforcing destructive pricing volatility.
The SEC has now been given the power to suspend the mark-to-market accounting rules. But if they exercise that power to simply remove yet another layer of protective regulation from the system, we’re simply switching one form of economic catastrophe for another.
Newt Gingrich has proposed what appears to be a logical compromise between these two extremes: “Perhaps a three year rolling average to determine mark-to-market prices would be a workable permanent system.”
And now I’ll say something I rarely expect to say: I think Newt Gingrich is right. A three year rolling average for long-term assets evens short-term volatility in the pricing of those assets, without completely disconnecting corporate accounting from any kind of objective reality. (The rest of his proposals, on the other hand, are just the standard Republican refrain of “cut taxes and deregulate”… which shows a rather stubborn inability to learn from past mistakes.)
Now What?
That’s the real question. I’ll admit that I’m not an economic specialist. I don’t know the best way to accomplish these things. (Although you probably couldn’t go too far wrong if you started by rolling back most or all of the Garn-St. Germain Depository Institutions Act and the Gramm-Leach-Bliley Act.) But it’s clear that these are things that must be done.
Because simply slapping a bandage on an infected wound won’t solve the problem.
And, really, this is just the beginning — a first step. Because the current and most immediate crisis we’re facing is merely the tip of the iceberg. Years of mismanagement under Republican economic theories have left our economy fundamentally dysfunctional. We’ve got a lot of work ahead of us. But I think this is a decent outline for the first step in the right direction.
ARCHIVED HALOSCAN COMMENTS
m man
I love self resolving regulation. but it seems to me most partys in the world seem to totally ignore it.
What I mean by self resolving regulation is regulation like crash barriers on a materway. the left sees lack of regulation as a cliff allowing out of control cars drivers to plummet to thier deaths, the right sees regulation as a steel wall bouncing out of control cars back into flowing trafic.
However well crafted regulation should be like carsh barriers absorbong the impact of an out of control car. It should kick in early, but kick in gently, it should have the capability to absorb not deflect, at a rate dependent on the varance from safe.
Monday, January 25, 2010, 4:15:32 PM
Justin Alexander
Interesting story here regarding a deal brokered with Countrywide regarding its outright illegal activities. It’s pertinent because the deal primarily revolves around various ways of restructuring bad mortgages to make them affordable for the people currently holding them.
In this case, the deal is being forced through by Attorney Generals because Countrywide actually broke the law. But is exactly these types of programs — which the article claims may help up to 30,000 Texans keep their homes — that I’m talking about.
And, like I say, I’m not a specialist in economics. So I don’t know the best way for these types of programs to happen. Maybe it’s government regulators coming in and force-feeding a clean-up of the system. Maybe it’s a matter of offering sweeteners in the form of government money to incentivize the loan renegotiations. Maybe it’s a combination of both. Maybe it’s some other idea entirely (providing insurance for any loan the bank is willing to re-negotiate to match the new regulations?).
Tuesday, October 07, 2008, 3:21:00 AM
Justin Alexander
@Lior: Let’s say that the Republicans had spent the last 30 years de-regulating car safety measures. Without regulation, the car makers (looking for quick profits) start cutting more and more corners. Car buyers who can’t afford any better end up buying cheaper because they need transportation and because the entire car market has become artificially inflated as a result of these unsafe vehicles being available.
The result is that a lot of cars out there have bad brakes.
And then comes a particularly wet season and suddenly tens of thousands of brakes are failing and people are getting into countless accidents.
And it’s not just the people who sold and bought bad brakes are who suffering: People who bought perfectly good brakes are getting rear-ended, insurance rates are skyrocketing across the board in an effort to cover these “unexpected” costs, the resulting expense is pushing everyone out of the vehicle market, and even responsible car-makers and dealerships are feeling the pinch.
Now, one can certainly say — as you do — that the people who bought the bad brakes knew what they were buying and that the people who made the bad brakes knew what they were making. And they should just have to suffer the consequences.
But they aren’t the only ones suffering the consequences. They never were.
This was a lesson we learned during the Great Depression. It’s a lesson we were reminded of during the S&L crisis. It’s a lesson we were reminded of again when Enron collapsed. It’s a lesson we’re re-learning today.
It’s perverse to point to the crisis of today — directly caused by de-regulating the banking and mortgage industries — and pretend that there’s no solution for preventing this type of crisis from happening again. There is such a solution. In fact, it’s a proven solution that worked for 40+ years before it was dismantled in the name of greed.
The only real question is how we can transition BACK to the system that worked. The system that was in place before the broken economic policies of the Republicans ruined this country.
Monday, October 06, 2008, 5:16:38 PM
VorpalAuroch
Also, Fannie and Freddie weren’t the major culprits in the bad loan area.
The investment banks were, Fannie and Freddie just got on the bandwagon because everyone was doing it. It was stupid, but not the cause of the crisis.
Monday, October 06, 2008, 8:25:35 AM
VorpalAuroch
Except that the crisis was caused by lack of regulation.
Clearly, the loans these comapnies sold benefited both parties in the short term, but no one in the long term (this crisis had to happen sometime).
Because there was no way anyone could benefit in the long run, they should not have been allowed. Therefore they should have been banned by law, which they weren’t. That’s lack of regulation, and it was the fundamental root cause of this crisis.
Also, Re:your PS. That’s exactly what Justin was saying. The borrowers didn’t understand the long-term consequences of their loan, and the banks didn’t tell them. All financial transactions are voluntary, except those that were predetermined by a voluntary contract and those required by law. Saying that because they are vountary we shouldn’t do anything for them is a faulty argument.
Monday, October 06, 2008, 8:23:57 AM
Lior
First, it’s not clear the government should have bailed out these banks. Bailing out Wall Street will have a negative impact on the economy, by encouraging investment bankers to go even more crazy next time around, knowing full well that they will be bailed out by the government if they fail. The problem is that any and all bailouts are by definition unfair.
By the way, the government now owns 80% of AIG, as collateral to a loan at a very high interest rate. Assuming arguendo that this bailout was fair, should the government bailout to “Main Street” be on the same terms? (that is: the government will buy your mortgage from the bank if you agree to have your interest rate go way up, and they get to foreclose when they want to, without all the legal hassles a bank has to go through).
Second, government regulations are designed to benefit the politicians. This means the goal is either to profit those who pay the politicians (regulations from the right), or to make the regulated entities pay for society’s goals (regulations from the left). After a crisis caused by government regulation (cheap money from the Fed, CRA forcing banks to make loans where they otherwise wouldn’t have, Freddy and Fannie underwriting everybody’s bad loans) I don’t understand your blind faith that further regulation and intervention will actually make things better.
If you want to change regulations, how about the one that says that banks must price the collateral according to the market value of “similar” houses as determined by recent transactions? It is this rule which forces a bank to foreclose today rather than restructure and hope for some money tomorrow — without the need for any government bailout.
As long as the banks must price the house based on what it’s worth today rather than the expected future value, keeping the loan on the books makes the bank run up against the capitalization minimum, another regulation. Thus the bank would rather have the house sold today rather than restructure the loan on better terms and get a future income stream.
Of course, allowing the banks to invent notional prices for the collateral would allow them to evade the capitalization rules. All I’m saying is that regulation is tricky and often has more unintended consequences than intended ones, even if the intended ones are actually beneficial.
PS: Read the Wikipedia article you point to. Most of the definitions (starting with the first) boil down to “it’s unfair to charge different prices to different people” or “it’s unfair that the better-informed side will come out ahead”. None of them refer to situations where the borrower can’t say “this mortgage is too expensive for me, I don’t want it” and the bank forcing them to take it anyway. In other words, all refer to voluntary transactions.
Sunday, October 05, 2008, 11:44:46 PM
Justin Alexander
Trying to re-define the term “predatory lending” to mean “any mortgage signed under the direct threat of violence” seems like a fairly useless definition of the term.
Wikipedia’s article on predatory lending, on the other hand, gives a fairly decent overview of the term.
As I say in the essay, there’s no question that the people who decide to sign-up for bad loans with adjustable rates or balloon payments or interest only terms made a bad decision. And there’s no excuse for that.
But, similarly, the investment banks being bailed out by the national government his week similarly made bad decisions. And there’s no excuse for that either.
So there’s plenty of blame to go around. But what I’m talking about is fixing a broken system: The mortgage and banking industries need to be re-regulated and restructured to prevent these types of crises.
In terms of re-structuring existing mortgages, there are several reasons for doing that:
(1) It’s not fair to reward those who performed the predatory lending with a big Wall Street bailout, while simultaneously shaking your finger at the people who were victimized by predatory lending on Main Street and allowing them to continue to suffer under a bad system.
(2) Much like bailing out those on Wall Street will have a positive impact on our economy (by restoring liquidity to the markets), restructuring bad mortgages to allow hardworking Americans to continue making their house payments will have a positive impact on the economy.
Because the homeowner’s credit won’t be ruined, their ability to participate as a consumer won’t be hamstrung. That’s good for the economy.
Because the homeowner’s payments will continue to be a stream of revenue for the lending institutions (instead of disappearing), that will increase liquidity in our banking industry. That’s good for the economy.
Because the house isn’t being foreclosed and dumped on the market, it’s not being added to the gluttonous supply of houses on the market. This will help the housing market to recover, which will be good for banks; good for ALL homeowners (who will see their equity in their current properties rise); and good for the economy.
Sunday, October 05, 2008, 2:44:24 AM
Lior
Has anyone been threatened with bodily harm if they don’t sign a mortgage? As far as I know essentially all the mortgage contracts under discussion were freely and voluntarily entered into by both parties. What exactly is “predatory lending”? Surely offering high-interest mortgages to high-risk borrowers is better than not offering them any mortgages at all? Surely banks have no interest in borrowers defaulting on loans [there’s no profits in that]?
If you think banks colluded by all of them raising the interest rate, that would be a serious charge. However, as far as I can tell, interest rates were kept artificially low throughout by the Fed, and that was a major cause of the problem.
Sunday, October 05, 2008, 1:28:10 AM