Feb. 24, 2009 – 21:53:23
For just a moment, set aside your ideological biases and marvel at Barack Obama. What a speech he delivered tonight. This is no ordinary president.
And for you free-market purists, keep in mind the president did not stomp on you while you are down. “It is time to put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation,” Obama said, “and punishes shortcuts and abuse.”
His stated goal is to let the market, not the government, hand out the rewards and punishments.
I wrote a column before the election suggesting that even those who despise government intervention in the market should vote for Obama. I continue to believe he is a sheep in wolf’s clothing for fiscal conservatives. The majority of the U.S. population has been excluded from the nation’s prosperity, a fact reflected locally in falling real wages and increasing poverty. Having a president who merely wants to tinker with capitalism is a whole lot better than one that wants to discard it. If his adjustments make free enterprise palatable for a majority of Americans, he will have saved the system from itself.
My only significant gripe with his speech is one that I could direct at almost any politician, Republican or Democrat. Obama joined the elected hordes in attacking Wall Street bankers for their irresponsibility.
The first problem with that position is that he, like most politicians, immediately follows it up by criticizing those same Wall Street bankers for not lending more after receiving their TARP hand-outs. The unfortunate fact is that, in this economy, not many loans look prudent. Employment histories have little value as layoffs escalate. Collateral is suspect when housing and the stock market are in a tailspin. Faced with massive delinquent loans on their books, banks are doing what is prudent: They are socking cash into their loss reserves. Taxpayers are shareholders in those banks now, and the bankers may well suspect that today’s rhetoric notwithstanding, we will not be forgiving if they blow TARP money on more bad loans.
The other problem with attacking bankers is they made precisely the same mistake everyone else made: They assumed the upward trend in real estate prices would continue. Every subprime borrower made this mistake. Congress institutionalized the mistake with Community Reinvestment Act legislation. As soon as a poor person could buy a house, we all thought, they should. A house doubled as a place to live and an appreciating investment.
Perpetual housing appreciation seems an impossibly naive assumption now, but it did not in 2005. Decatur housing had appreciated in value every year since 1995. Birmingham housing appreciated every year since 1985. No one was predicting a few years ago that Merced, Calif., would see its housing values drop by half in a single year, which was the case in 2008.
Much of the criticism of investment bankers has been their use of securitized mortgages. Pools of thousands of mortgages were sold, divided and insured. The consequences were disastrous: Lending banks, with little at stake, performed lousy underwriting. Loan delinquencies in California undid insurance companies and investors in New York and Georgia. The concept, though, had merit. Securitized mortgages meant every community had access to the lending that facilitated home ownership. If Decatur banks were low on deposits, no problem. Money flowed easily across geographical borders. That’s a good thing, although it’s tough to remember that in the midst of a recession that keeps getting worse.
Bankers are a scapegoat. It makes no sense for one who believes in an unimpeded free market to blame a banker for losing money. The market punishes failure, so we don’t need to. In this case, however, externalities were involved. The entire economy was balanced on those banks. Regulations are designed to control such externalities. If Washington Mutual’s decisions have the power to wreck the entire economy, then the government needs to have input into those decisions.
Excessive regulation did not cause the financial crisis. Ineffective regulatory oversight, however, played a part.