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Tuesday, March 28, 2017

The crash was preordained

Posted Wednesday, September 17, 2008, at 9:35 AM

Beginning about 30 years ago, with the election of Ronald Reagan, there began a fundamental shift in the philosophy of how the government should control the economy, a series of moves, endorsed by virtually every administration since then, that I believe helped contribute to the current economic meltdown we're facing.

Several factors led to this crisis.

First was the belief that large corporations and industries would be better controlling themselves through the marketplace, a philosophy that lead to massive de-regulation and oversight of those major industries. The theory was it would improve competition and open the door for the "small dogs" to get in the game.

It didn't quite turn out that way.

The airline industry, for example, began such cutthroat competition that not only were the small dogs quickly swallowed up, but the big dogs overexpanded and cut their profit margins so thin that the slightest blip on the radar drove almost all of them into bankruptcy.

Those that failed merged with or were bought out by larger competitors, creating supercorporations that, when they got into trouble, required the government (read taxpayers) to bail them out. We have fewer major airlines today than we had 30 years ago, the costs are much higher for travelers and the services provided are considerably reduced (remember when they used to serve you a real meal -- for free -- on long-distance flights?).

The secondary impacts slaughtered the airline construction industry, and combined, tens of thousands of jobs were lost.

Today, for example, the U.S. essentially has only two manufacturers building our military fighter aircraft, and one of them (Boeing) is going to functionally get out of the military fighter aircraft business soon, leaving only Lockheed. Increasingly, foreign firms will be bidding to provide our military might (and taking our technology with them).

Deregulation and lax oversight of the banking and financial businesses of this country (particularly during the laissez faire days of the current administration who dealt with big business on a wink-wink basis) led to similar failures and mergers. There are fewer major institutions competing with each other today than there were 30 years ago, and they are so huge that if they develop problems, the government is left with almost no choice but to use taxpayer dollars to bail them out.

Second, was the belief, advocated by government policy makers for 20 of the last 28 years, in the theory of "trickle down" economics. The theory is, if you give tax breaks to the wealthiest individuals and corporations, they will use the money to reinvest in their own companies, adding jobs to the economy.

But, by and large, they didn't.

Instead, they used the windfalls to pour money into other investments, largely purely financial speculations. They used the money to invest in money to make money, rather than investing in goods and services to make money.

They put money into dot-com stock, which had exploding stock prices, but no significant assets to back up the value of the stock. A couple dozen programmers and their computers could handle the business (no real boost in job growth there), but when the dot-coms began to fail in droves, there were no significant assets to help repay investors.

And in the last decade, they poured their money into land speculation, buying up, for example, subprime mortgages.

Subprimes were an ideal investment (notice this use of their tax cut money created almost no new jobs, either, merely greater wealth for those who already had money to burn).

"Regular" home loans might make only a 2 or 3 percent profit. But subprimes could bring in a 6-10 percent profit, even if they were riskier.

In fact, some financial institutions actually tightened up their criteria for regular home loans in order to steer buyers into the more lucrative subprime market, which made mortgage payments for those buyers much higher -- forcing the average Joe who had a subprime to operate on a tighter budget, which left him little pad for unexpected expenses.

But it was a great way for lenders to make money, and they expanded that to include easy-to-get credit cards at anywhere from 10 to 24 percent interest (where they could make massive profits but which were misused by consumers who built up huge credit debts).

Between deregulation and tax breaks that weren't being used the way they were intended, the rich were getting a lot richer.

Meanwhile, since the government had robbed the social security accounts for so long that future benefit payments were at risk, individuals were encouraged to invest in 401K plans, to create their own retirement accounts that would be managed by these same financial institutions. It was an idea that looked good when things were going well, and the value of stocks was climbing (well, well past the actual assets of the companies that issued those stocks). But apparently no one in the government pushing that idea thought to consider what would happen if things went bad.

Then oil prices began to go through the ceiling, pushing costs for just about everything up dramatically (a product of a total lack of a coherent, long-term energy policy by every administration since the Arab oil embargo of 1973). American consumers, the "little guys" who had been living on the edge because of the high-priced credit they'd freely accepted and used, went under, triggering a domino effect that finally caught up with the big lenders, including Fannie Mae and Freddie Mac.

Once again, the government had to step in to save companies from bad corporate decisions (by officers who make a quarter of a billion dollars a year to make those decisions). And once again, the small taxpayer has been asked to pony up to save the rich, because if they don't the economic dislocation is so huge they get hurt even worse.

But there is a limit to how much the government (taxpayers) can bail out big business and the wealthiest 1 percent of this country. And it may have hit that point. We're just a few more big bankruptcy's away from tipping over from recession to depression.

Meanwhile, the regular Joes who took the government's advice and put large amounts of money into 401Ks, have seen that hedge for retirement reduced to a small, scraggly bush. The rich got hurt too, but have so much wealth most can absorb the losses and still live high on the hog (OK, maybe they'll have to sell one of their seven homes). But the little guy has been slaughtered (and may have to sell his only home).

There's a couple lessons here: 1) trickle-down economics doesn't work. The little guy merely gets trickled on and pays for it when the big guys make horrible decisions; and, 2) overregulation of industries can be a bad thing, but massive deregulation has turned out to be worse.

For once, we need government policy makers to reinvent themselves and focus on strengthening and protecting the little guy, rather than being in bed with the big corporations.

But until that happens, we'll keep seeing the same disasters happening over and over again, and you and I will keep paying for it.

Showing comments in chronological order
[Show most recent comments first]

Thank you, thank you, thank you. It's been what I have been saying for years, only not as completely.

-- Posted by senior lady on Wed, Sep 17, 2008, at 10:16 AM

OH! Please! Everyone knows that the crisis started back during Clintons [a Democrat] administration!

It was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

At the same time, the Clinton administration was pushing Fannie and her brother Freddie Mac to buy more mortgages from low-income households.

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today's nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

And the worst is far from over. By the time it is, we'll all be paying for Clinton's social experiment, one that Obama hopes to trump with a whole new round of meddling in the housing and jobs markets. In fact, the social experiment Obama has planned could dwarf both the Great Society and New Deal in size and scope.

There's a political root cause to this mess that we ignore at our peril. If we blame the wrong culprits, we'll learn the wrong lessons. And taxpayers will be on the hook for even larger bailouts down the road.

But the government-can-do-no-wrong crowd just doesn't get it. They won't acknowledge the law of unintended consequences from well-meaning, if misguided, acts.

Obama and Democrats on the Hill think even more regulation and more interference in the market will solve the problem their policies helped cause. For now, unarmed by the historic record, conventional wisdom is buying into their blame-business-first rhetoric and bigger-government solutions.

While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.

Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.

-- Posted by FlagshipOne on Wed, Sep 17, 2008, at 1:24 PM

Very well articulated - you are on it!

-- Posted by kimjean577 on Wed, Sep 17, 2008, at 3:24 PM

I think we could blame the Clintons for every bad thing that has ever happened. Seriously. And if she had won the democratic nomination we would be electing John McCain next month.

-- Posted by outtathere on Wed, Oct 22, 2008, at 2:09 PM

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Brian S. Orban
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