Friday, January 28, 2011

Built Without Bedrock

What was the point?

America's Financial Crisis Inquiry Commission released its official report Thursday on the causes of our Great Recession. And about the only eyebrow-raising item in it comes from current Fed chairman, Ben Bernanke, who considers this crisis worse than the Great Depression.

If President Obama and those who worked on it were expecting an outpouring of affirmation and gratitude, no wonder they're probably disappointed.

Lack of Logic Equals Lack of Integrity

From the start, liberals hobbled the Commission's integrity by insisting on appointing six of its ten members. And Thursday, we saw the fruits of that petty political machination: four dissenters - all of the Commission's Republicans - withheld their affirmation of the final report.

Part of the reason these Republican holdouts couldn't sign off on the effort involves partisanship, naturally. But most of it involves the Commission's overall failure to logically appreciate broader contributors to the financial meltdown apart from the easy target: big bank greed.

For example, likely factors such as the complex global financial games big bad banks were playing in foreign sovereign currencies were generally glossed over. As if today's travails of Greece and Ireland represent mere footnotes.

But the Commission's most egregious snub was summarized in a New York Times article:

"The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the 'aggressive homeownership goals' set by the government as part of a 'philosophy of opportunity' were not major culprits."

Oh, really?

All That Debt? Not a Problem?

When you're tracing the roots of a problem, don't you dig down deep to reach the bedrock upon which the rest of your situation has been structured? In this case, the bedrock was subprime lending, right? Apparently not, according to the six Democratic members of the Commission.

By summarily dismissing the subprime mortgage fiasco, the Commission appears convinced that having so many people buying homes they couldn't afford would never have precipitated a financial crisis of catastrophic proportions. Instead, from their perspective, bundling up the bad debt and selling it to unsuspecting investors was the core precipitant for the Great Recession.

Obviously, the derivatives, swaps, and other financial hocus-pocus concocted by the big bad banks became an insurmountable problem. But correct me if I'm wrong: those bad loans would still have been out there, right? They were the commodity everybody was either trying to ignore, get rid of, lie about, sell, and buy. Right?

Even if the bad loans hadn't been wrapped up into appealing boxes of pseudo-money, and investors hadn't bought up the tawdry inventory of sub-prime loans, wouldn't SOMEBODY still be left holding the bag? Can debt automatically vanish in a capitalistic system? Does the real problem really lie in big bad banks minimizing their own risks through uber-creative pass-the-buck schemes?

With all due respect to the Commission, the problem they picked may have the easiest culprits to vilify, since many Americans revile Wall Street bankers. However, getting back to the bedrock of this case, didn't the real problem consist of mortgage brokers selling loans to customers they knew couldn't pay the debt? And home buyers buying more home than they should have logically known they could afford?

True, investigating subprime mortgages doesn't make for engaging political theater. Doing so would, by extension, implicate many more voters than the relatively few financial wizards at the big bad banks. Confronting irresponsibility is always easier when you can shift the blame.

How Free Should Free Markets Be?

Not to obfuscate the corrupt morality of bankers who gleefully shilled obscenely risk-tainted products to equally greedy, due-diligence-averse customers. But aren't we missing a huge opportunity to fix some gaping problems in our lending industry by refusing to acknowledge the significance of what got this whole thing going in the first place?

Some financiers might counter that since suddenly, mortgages have almost become extinct in the United States, a healthy correction in the industry has taken place. Lenders have sobered up, borrowers again need to prove employment and income, and we're back to playing with real money and genuine credit.

But if most all of the same players remain in the game, who's to say that ignoring fundamental problems won't again become a costly problem? If we're not willing to get a little dirty with reality, who's to say that our next little financial crisis - they seem to be cropping up like clockwork every decade now - won't be even worse? We could be taking two steps forward and one step back.

Here again, die-hard capitalists say periodic volatility is healthy for a lucrative economy. Keeps companies from getting bloated. Helps cultivate ingenuity. Well, if by ingenuity, they're talking about subprime mortgages and credit default swaps, then I guess we truly deserve the moral vacuum our society is becoming.

At this point, Darwinian capitalists would point to the inevitability that free markets are piloted by the most capable people and methodologies in the world. They're like the cream that rises to the top. However, can we automatically assume that capitalism will inevitably bring into leadership those people with the perfect qualifications to match and overcome problems? Or will it just bring to the top those people with the best qualifications in the pool? Doesn't that overlook the real possibility that those qualifications, while being the best available, may still not be sufficient for the task at hand?

What is the extent to which America's free market gurus have convinced society to go ahead and rest assured: capitalism is designed so that the best-qualified people are running the show? What is the extent to which we've all drunk the blind-faith-in-capitalism Kool-Aid?

Another Missed Opportunity?

If anything, this charade of a Commission has only increased my skepticism that capitalism can police itself. Why don't the six Democrats want the subprime mortgage mess implicated? What didn't the Commission find?

I suspect one little scenario they would like to ignore was documented in this amateur YouTube video. It retells the struggle of Republicans who were seeking to strengthen regulatory oversight of Fannie Mae and Freddie Mac, several years before the mortgage melt-down. Funny, right? Republicans wanting more regulations! They were fiercely opposed, however, by members of the Congressional Black Caucus, with California's Maxine Waters crowing about the success of no-money-down financing.

Subprime lending is the boil Democrats don't want lanced. Why is that? If capitalism is indeed expected to heal itself, how can that happen with such myopic political subterfuge? Sure, it's easy to blame the big bad banks. And yes, if it wasn't for their greed, our economy would probably be much stronger today. But even all the big bad banks combined fail to hold a monopoly on greed.

Conservative financial analyst and American Enterprise Institute scholar Peter Wallison, one of the dissenting Republican members of the Commission, will be submitting his own analysis and interpretation of the impact subprime mortgage schemes played in the staging of our Great Recession.

Let's hope his analysis makes more sense than the Commission's. At least it won't be any worse.
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