In the Presidential debate on Friday night, Sen. Obama rushed to frame the financial crisis as the “final verdict” on the “failed” economic policies of the Bush Administration: to “shred regulations,” “consumer protections” and to “give more and more to the most.”
Sen. McCain faulted the “casino culture” on Wall Street after calling for the firing of the SEC Chairman. Speaker Pelosi, when asked on MSNBC whether her “party deserves some responsibility” for the turmoil responded, “No!” Rather, she ascribed this debacle to the “mismanagement of the Bush administration.” “The era of golden parachutes for high-flying Wall Street operators is over,” Pelosi said on Monday. She denounced the “risk-taking and greed of financial institutions” as “crony capitalism.”
Over the last week, Americans looked to Washington for leadership on the financial crisis. Instead, they found irresponsible hesitation. Sensitive negotiations on the bailout bill faltered as politicians reverted to their old habit — blame and do nothing.
So if that’s what the politicians really want — to halt legislation at this critical juncture — then let’s play the blame game.
The private sector operates within rules enforced by the government. Even in an economy based on free enterprise, it falls upon the state to structure markets so that they operate with transparency and efficiency. Thus, the political establishment, not the financial establishment, should take responsibility for causing the crisis. Of course, CEOs should remain accountable to shareholders for not self-regulating. But do not be deceived when politicians scapegoat “greedy” speculators, short-sellers, execs, and foreigners.
Counter to Pelosi’s assertion of innocence, both parties share the guilt. The media has ignored years of bipartisan failures that led to this crisis. Those scandals should be exhumed.
It began with President Clinton’s 1993 rewrite of the Community Reinvestment Act. New portfolio requirements coerced banks to flood the housing market with trillions in risky lending to low-income communities, in the name of “affordable housing” and equal access for the “under served.” In the same stroke, the Clinton Administration lowered equity requirements for Fannie Mae and Freddie Mac to 2.5 percent of their capital, giving them 40:1 leverage. If college students could do that, with a $50,000 tuition you would control $2,000,000!
Attempts by the Bush Administration in 2003 to reform oversight of Fannie and Freddie should not be overlooked. Congressional democrats blocked passage of the bill in a strict party-line vote. At the time, Rep. Barney Frank said that the entities “are not facing any kind of financial crisis.” In 2005, McCain tried to pass another reform act, which met a similar fate.
It is the height of irony that in recent days, as the chairman of the House Financial Services Committee, Barney Frank gets praise for his role as a key figure in the bailout talks, scrambling to avert the disastrous consequences of Bush Administration policy. Barney Frank is the portrait of congressional complicity, if not outright corruption, in this crisis. The Wall Street Journal closely covered his ties with the corrupt CEOs of Fannie Mae and Countrywide, Franklin Raines and Angelo Mozilo.
Fannie Mae’s fate illustrates the political roots of market failure. In an instance of blatant political cronyism, Mr. Raines, Clinton’s White House budget director, became the CEO of Fannie Mae. Raines exposed the company’s balance sheet to insane risks while deliberately exaggerating earnings to receive astronomical bonuses. Why not? Fannie Mae had an implied guarantee from the US Federal Government – the taxpayers would bail him out. To shore up that promise, Fannie Mae and Freddie Mac have showered Congress with money for decades and incidentally, Senators Chris Dodd and Barack Obama top the list of recipients since 1989. Sure, Raines was corrupt, but politicians like Frank who shielded him from oversight and regulation deserve ultimate responsibility.
The Republicans controlled both Congress and the White House from 2000 to 2006, yet they presided over the largest increase in the size of government since Johnson’s Great Society. Today, those same House Republicans object to the $700 billion bailout package as the “road to socialism.” Perhaps over $20 billion a year in farm subsidies, paid during years of record agricultural prices, escaped their notice? If only they had shown their fiscal restraint on just this single issue during the last eight years, when times were not so bad, they could have saved the taxpayer $160 billion, or 22 percent of the cost of the bailout. Instead, they chose to drive this country into debt, funding scores of similarly wasteful programs, creating a gigantic and clumsy bureaucracy to administer them, and encouraging dependency on big government. Shame on them for abandoning fiscal conservatism and limited rule.
In the Bush Administration, regulation did not keep up with the past 30 years of financial innovation. In 2004, the SEC made the five top investment banks exempt from the 12:1 debt-to-net capital ratio, which allowed them to leverage up to 40:1. Agency officials did not identify, expose, or treat systemic risks — it left that up to the free market. That’s fine, but unfortunately they did not make sure that those markets remained transparent and accountable. For example, the new market for credit default swaps, which has reached the staggering notional value of $62 trillion in only a few years, remains entirely unregulated. If the Administration had brought this market onto an exchange, it would have forced participants to realize losses to meet margin requirements and brought full-disclosure, instead of hidden statements on a balance sheet.
Those who fail to learn history’s lessons, repeat its mistakes. If Americans observing the financial crisis do not take away the right lessons with them to the polls, the fundamental problems in the economy will not be solved.
This crisis should expose the profound economic ignorance of our national leaders. It should also highlight the need for effective but lightweight regulation and transparency in both Washington and Wall Street. It should realign executive compensation with the interests of shareholders, preserving the integrity of the financial system and protecting taxpayers. It should focus government priorities towards cutting frivolous bureaucracy, encouraging growth, and repaying the debt.
Once Americans discover these essential truths, then the political system can quit the blame game and finally move onto the imperative task of repairing the financial system.
Francis J. Pedraza is a sophomore in the College of Arts and Sciences and a cadet in Army ROTC. Contact him at francispedraza@gmail.com [1]. Perception Shift usually appears Mondays.
Links:
[1] mailto:francispedraza@gmail.com