Dick Armey's analysis consisted of nothing more than a bunch of laissez-faire talking points about how wonderful markets work when freed from government regulation, e.g., “let the market settle this stuff and let the people who created the problem take the consequences.”
The problem Dick is that the people who created the problem aren't taking the consequences. The guys who wrote all the credit default swaps at AIG collected their millions in salaries and bonuses. The guys who created the mortgage backed securities at Lehman and Bear Stearns have already cashed their checks.
They may be out of work for the moment, but Geithner's plan is going to create demand for people who understand how these instruments work. I have no doubt that many of these guys are going to wind up collecting huge paychecks to help clean up the mess that they got paid to make in the first place.
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One of the issues that the market has yet to resolve (afaik) is that executives are essentially immune to consequence. Once you've got a couple of million dollars in the bank it doesn't really matter if you get canned. For the average person you're never going to get there, but for many executives that much is a matter of months. Everything after that is gravy.
ReplyDeleteA fair assessment of the situation will have to address the repeal of the Glass Stegal Act (Clinton admin), the Community Reinvestment Act (Carter admin, expanded by Clinton and Bush II) and Fannie Mae loosening lending standards by Clinton Era Herb Moses (aka Barney Frank's domestic partner.)
ReplyDeleteMix all that with 9-11, Greenspan dropping rates to zero in the 2000s, Chris Cox asleep at the SEC and you have a prescription for disaster.
I guess it is all a matter of perspective. I work for a corporation ... I need that capitalism thingy to work one way or the other.
I think the repeal Glass Stegal falls just as much on Republican legislators like Phil Gramm as it does on Clinton although I am not sure exactly what role it played. It may have caused different areas of the financial system, e.g., banks, brokers, and insurance companies, to become further intertwined, but I don't know that it induced any new risky behaviours.
ReplyDeleteThe biggest problem was the idea that financial institutions rather than government agencies were the best ones to deter inappropriate extensions of credit. That was the thinking behind leaving credit default swaps unregulated and that was the thinking behind allowing the big investment banks to increase their leverage ratios in 2004. That was most certainly based on free market principles of the kind that Armey embraces.
Fannie Mae and Freddie Mac were certainly badly run over-leveraged companies, but I am not sure that their lending standards were a problem. Their default rates are still significantly below national averages and it was pretty late in the game before they got into anything but the highest quality mortgages and they never got into the riskiest ones.
The CRA is a red herring.