It was the institution of government that unleashed those vices of greed and avarice encouraging people to build on sand. It did so by first placing a policy priority on the good idea of home ownership but pursued it with a fanaticism that neglected other goods such as prudence and rational risk assessment.
Rev. Robert A. Sirico, president of the Acton Institute:
In a very familiar parable, Jesus tells the story of two home builders. One built a house on sand, the other on rock. The house on the rock withstood the weather. The one built on sand did not fare so well: "The rain fell, and the floods came, and the winds blew, and they beat upon that house, and it fell, and great was the fall thereof" (Matthew 7:24-29).
If the parable were retold today, it might include an episode in which treasury officials and members of Congress cobbled together a bailout program for the owner and lender of the house on the sand. No matter how much money they spent, however, the ending would be the same.
Six weeks ago, when the $700 billion bailout of failing financial firms was being considered, the country was swept up in the debate. The bill, which created the Troubled Assets Relief Program (TARP), passed with thin public support. Washington claimed that the bill was necessary to keep the world from an economic Armageddon. Many people suspected that it amounted to little more than welfare for Wall Street.
Who was right? Consider the dramatic change made to the way the program works, as announced last week by Treasury Secretary Henry Paulson. He said that the government would no longer purchase toxic assets from failing institutions. It would now start giving the money directly to lenders. In other words, the entire rationale of the bailout changed overnight.
Why the change? The problem with the original idea is that it violated every common-sense rule of business. The government would pay far more than the market would bear and then, no doubt, we would watch as the market price slid to the bottom. Every time a supporter claimed that this was a good deal for taxpayers, you could almost sense the rise in deep skepticism. If you believed them, I've got a house built on sand to sell you.
The rest.
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8 comments:
"It was the institution of government that unleashed those vices of greed and avarice encouraging people to build on sand. It did so by first placing a policy priority on the good idea of home ownership but pursued it with a fanaticism that neglected other goods such as prudence and rational risk assessment."
Oh please.
I have long since given up the idea that all things 'free' market are 'good', and things 'statist' are bad. With the advent of a professional managerial class(who have no loyalty at all to anything other than themselves), that is even less true than it was in the past.
No-one held a gun to the head of the criminal incompetents in Wall Street and compelled them under pain of death to deliberately misrepresent the 'assets' they were peddling for resale. No-one forced any institution to give loans to those who could not possibly manage to repay them.
These abysmal useless creatures did it all by themselves.
And why ?
A. Arrogance.
B. Contempt for the 'mundane'.
C. Greed.
D. Incompetence.
E. Boredom.
F. Sheer Stupidity.
Sure Government was derelict and negligent and totally misguided. But it merely established a 'possible' playing field. The laissez-faire capitalists were the ones who decided to play on it. Not only play on it occasionally but go all in and make it their HOME FIELD. Now that they have failed completely, they are all begging for salvation from the State. Weasels that they are by nature.
I don't care how many apologists ,for the diseased capitalism we now have in place, say that it was not a failure of regulation that was the root cause of this debacle.
It WAS precisely that. That the regulations actually in place were wrong in the first place is not the point. That the PROPER regulatory environment was not in place is.
dougf:
I would say that it all depends on what you mean by "proper regulatory environment." (I've learned never to assume what people mean when they throw out a term like that - it often leads to needless confusion.)
While I wait for your clarification on that, I'd like to comment on your statement that, "No-one held a gun to the head of the criminal incompetents in Wall Street and compelled them under pain of death to deliberately misrepresent the 'assets' they were peddling for resale. No-one forced any institution to give loans to those who could not possibly manage to repay them. These abysmal useless creatures did it all by themselves."
I'll concede the gun part, and will not argue with the probability of your A-F list as having no small part in the debacle. There is plenty of blame to go around. But Fr. Sirico wrote his article in large part in reaction against those who have been trumpeting this crisis as an indictment of free-market capitalism. It is anything but.
Let's start with US federal government's 1977 Community Reinvestment Act (CRA), under which, as economist Thomas DiLorenzo explains, "the Fed and other financial regulators have pressured/extorted banks into making more loans to less-than-creditworthy borrowers than they would normally be willing to risk." DiLorenzo explains:
"When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous "community groups" that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded "community groups" like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other "community groups" by giving them millions of dollars as well as promising to make even more dubious loans.
In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company ("Freddie Mac") pioneered the "securitization" of bundles of these high-risk loans so that they could be sold on secondary markets. Such "securitization" exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges" (published online by the Fed),
Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals. (p. 3)
In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act loosened up the regulatory barriers to bank mergers. Consequently, said Bernanke, "As public scrutiny of bank merger and acquisition activity escalated, advocacy groups [like ACORN] increasingly used the public comment process to protest bank applications on CRA grounds." In other words, there was a burst of additional legalized extortion perpetrated by the Fed and its pet "activist organizations" beginning in the mid-1990s. As a result, says Bernanke, "banks began to devote more resources to their CRA programs." What an understatement.
Also in 1995, the US Treasury Department created the multibillion-dollar "Community Development Financial Institutions" fund to "provide banks with access [i.e., taxpayers' dollars] to new opportunities to finance community economic development" as "encouraged" by the CRA, said the Fed chairman.
The government also "streamlined" the regulatory requirements for CRA loans in 1995, allowing — and indeed pressuring — banks to make such loans without the benefit of many traditional credit-worthiness criteria, such as the size of the mortgage payment relative to income, savings history, and even income verification! Instead, the Fed told banks that participation in a credit-counseling program, many of which are federally funded, could be used as "proof" of a low-income applicant's ability to make his mortgage payments. In other words, federal bank regulators required banks to make bad loans based on nonexistent credit standards."" [source]
So, I'd argue that the "abysmal useless creatures" had a little help along this highway to financial hell, and were in fact joined at the hip with federal regulators. "Laissez faire?" I think not.
Linda, I enjoyed reading your detailed analysis of the 'background' to this financial debacle. Very informative.
And what you say here is undoubtedly correct, but who exactly are the bank/insurance/equity managers supposed to represent in the end ? Are they not supposed to represent their shareholders(since most are public corporations)? They RUINED their companies, and not satisfied with merely that, set in motion a chain of events that may ruin us all over the course of time. How is that possibly an OK thingy ? Was there not one person in charge who was willing to stand up and say that ---"This Is Madness. I will NOT hazard my shareholder assets in this way. It is a doomsday machine."
Evidently not.
I read another article which stated that the credit rating agencies (whose machinations and malfeasance) allowed all these BAD LOANS to be 'spread around', had a business model which did not allow for any drop in real estate values. In other words the assets would always continue to appreciate in value, thus ensuring that even garbage loans would likely never go 'south'. Evidently when it was pointed out that the Emperor might have no clothes, the dubious ones were looked upon as if they had suddenly grown two heads. It appears that the word inconceivable was being freely used in the 'Princess Bride' sense. Didn't work out well there either.
I ask you ---- ,all Government 'direction' aside, was this not madness of the first order? And it was SOLELY the result of a corrupt class of greedy incompetents deciding that they knew more than everyone else in the entire history of the World. The faulty 'regulation' part consisted of them being able to do what they did. I make no pretense to knowing precisely what 'regs' would have prevented the idiots from running the asylum into the ground, but I am sure they could not have been 'rocket science'.
Essentially ---- Thou shalt not make loans based upon business models that are based upon wish-fulfillment. Since it's now the Xmas Season, perhaps we need Mr.Potter to step up and ---Just Say No .
dougf:
First, I'll take a wild guess here on the article you were reading - this one? I agree - it was madness, and "doomsday machine" is as good a word as any I've heard. Princess Bride - one of my favorite books/movies. So, to all those greedy cretins looking for bailouts, and their equally immoral enablers (and creators of moral hazard) in Congress, one can presumably say: "Hello. My name is Inigo Taxpayer. You killed my economy. Prepare to die." (Unfortunately, I don't foresee any happy ending here - only an excruciating, prolonged death scene as the government futilely keeps trying to prop up/rebuild the sand castle as the tide (tsunami?) draws inexorably closer to shore...) This debacle is, at heart, a moral issue - and the answers on how to avoid another such fiasco may lie in asking the right questions. Thanks for your thoughts on this - there's a lot to unravel.
Human nature is such an ugly thing...
A person / people in positions of authority pass a bill and / or make rule that seems contrary to good sense, I will try avoid it and or avoid using it.
Then person / authority comes to me and a member of my group (team, coworkers, whatever) and suggests strongly that I / we use the rule andpoints out that I / we need to to heed.
There is still resitance because it seems antithetical to whatever we are doing. The person / authority on the rule goes to our leader and points out that...
1) rule is good
2) person / authority will be pleased when it is used
3)team leader will be highly thought of by authority if rule is used
4)praise and reward heaped upon those applying the rule - disdain and scorn be heaped all others
5)team leader advances in stature & gets rich... new team of players gets formed and climbs ladder to wealth... old team advances to receptionist and mailroom position...
6)person inauthority advances in power and position group that makes the rules
Sorry dougf. That is the way government works. IT CAN BE STUPID, DUMB, BAD, UNCONSTITUTIONAL, ET CETERA. PROPERLY DONE IT CAN BE GOOD AND SUCESSFUL. AMORALLY, EVERBODY LOSES AND THERE ARE NO LONG TERM GAINS.
Linda, to misqote a scene from one of my favorite movies and your favorite books...
A guy in funny clothes and a pointy hat comes running up and says, in his own lispy way...
"Banks! Govewement! Mewaige!"
And gentle spirit, that is why the Federal Reserve was born right there on Jekyl Island in 1912-1913. The rest is history. That's just the way government works. and a happy nod to PRINCESS BRIDE.
Kermit
Human nature is such an ugly thing...
A person / people in positions of authority pass a bill and / or make rule that seems contrary to good sense, I will try avoid it and or avoid using it.
Then person / authority comes to me and a member of my group (team, coworkers, whatever) and suggests strongly that I / we use the rule andpoints out that I / we need to to heed.
There is still resitance because it seems antithetical to whatever we are doing. The person / authority on the rule goes to our leader and points out that...
1) rule is good
2) person / authority will be pleased when it is used
3)team leader will be highly thought of by authority if rule is used
4)praise and reward heaped upon those applying the rule - disdain and scorn be heaped all others
5)team leader advances in stature & gets rich... new team of players gets formed and climbs ladder to wealth... old team advances to receptionist and mailroom position...
6)person inauthority advances in power and position group that makes the rules
Sorry dougf. That is the way government works. IT CAN BE STUPID, DUMB, BAD, UNCONSTITUTIONAL, ET CETERA. PROPERLY DONE IT CAN BE GOOD AND SUCESSFUL. AMORALLY, EVERBODY LOSES AND THERE ARE NO LONG TERM GAINS.
Linda, to misqote a scene from one of my favorite movies and your favorite books...
A guy in funny clothes and a pointy hat comes running up and says, in his own lispy way...
"Banks! Govewement! Mewaige!"
And gentle spirit, that is why the Federal Reserve was born right there on Jekyl Island in 1912-1913. The rest is history. That's just the way government works. and a happy nod to PRINCESS BRIDE.
Kermit
It is a sad day in our history when a person, people and companies are not allowed to fail.
"If You Want to Succeed, You Have to be Willing to Fail, Look Stupid, and Admit Your Ignorance."
By Lynn Marie Sager
These are very wise words. How can we reach excellence if our sick, failed attempts are glossed over with welfare money from the taxpayers? I am so glad I am retired now and do not have to watch my tax money go to a bunch of losers like the auto companies, the insurance companies, Wall Street and the thousands of stupid people who bought houses when they knew they couldn't, in a million years, pay for them. Those people should be ashamed to accept being bailed out by some of you folks who are still working and paying taxes! Shame on America! (Thanks for letting me get this off my chest)
You're welcome, CA - if sanity doesn't prevail, reality will - I'm praying for your country, because there don't seem to be any sane realists in charge anymore.
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