Wednesday, October 15, 2008

Present and Unaccountable

Barack Obama likes to go on about how "deregulation" under Republicans is at the root of the economic woes we now face. He holds this out like some kind of talisman, highlighting the Greed and Short-Sightedness of the GOP...a charge which, I fear McCain has not done nearly enough to debunk.

But bunk it is, of the worst kind.

Ed over at Hot Air linked to a Peter Wallison editorial in the WSJ which speaks to this bit of preposterous prevarication by The One. On this matter of "deregulation," it is worthwhile to quote the editorial at length:

If Sen. Obama had been asked for an example of "Republican deregulation," he would probably have cited the Gramm-Leach-Bliley Act of 1999 (GLBA), which has become a popular target for Democrats searching for something to pin on the GOP. This is puzzling. The bill's key sponsors were indeed Republicans, but the bill was supported by the Clinton administration and signed by President Clinton. The GLBA's "repeal" of a portion of the Glass-Steagall Act of 1933 is said to have somehow contributed to the current financial meltdown. Nonsense.

Adopted early in the New Deal, the Glass-Steagall Act separated investment and commercial banking. It prohibited commercial banks from underwriting or dealing in securities, and from affiliating with firms that engaged principally in that business. The GLBA repealed only the second of these provisions, allowing banks and securities firms to be affiliated under the same holding company. Thus J.P. Morgan Chase was able to acquire Bear Stearns, and Bank of America could acquire Merrill Lynch. Nevertheless, banks themselves were and still are prohibited from underwriting or dealing in securities.

Allowing banks and securities firms to affiliate under the same holding company has had no effect on the current financial crisis. None of the investment banks that have gotten into trouble -- Bear, Lehman, Merrill, Goldman or Morgan Stanley -- were affiliated with commercial banks. And none of the banks that have major securities affiliates -- Citibank, Bank of America, and J.P. Morgan Chase, to name a few -- are among the banks that have thus far encountered serious financial problems. Indeed, the ability of these banks to diversify into nonbanking activities has been a source of their strength.

Got that? The one bit of actual deregulation which Democrats are able to cite in connection with this mess not only was introduced and approved during a Democratic presidency, but ultimately fails the evidence test for any actual relationship with those institutions which have failed. The "deregulation" dog simply won't hunt, however plausible it may sound, since Republicans generally are in favor of reducing the stultifying effects of excessive regulation on the dynamism and efficiency of free markets. But while we're on the subject of the potential for sensible regulation to have staved off the Economic Crisis, see if you can guess who said this, and when:

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. [Office of Federal Housing Enterprise Oversight]'s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
Give up?

Then of course, there's this bit from the New York Times, from 2003. These last four paragraphs are particularly perky on the palate:
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.
The problem here wasn't too much or too little regulation, but the wrong sort of regulation...the kind that mandated that loans be provided to those who could not afford them (under the ever-effective cover fire of possibly being branded with charges of racism), and that those loans be backed/bought up by the GSEs, FM&FM. This created powerful incentives to treat those risky loans like safe investments and to securitize them and spread them throughout the world economy like herpes in a rural co-ed dorm in Winter. That's the sort of thing that makes it impossible for a free-market system to accurately assign value and operate as it should. It artificially inflated the value of the housing market by flooding it with demand, while betting outrageously on the perpetual meteoric growth of that market, and studiously ignoring the fact that it was built on pure hot air.

Essentially, the GOP and some Democrats were trying to impose sensible regulation on regulators who were lacking in sense, so that they could then de-regulate the ensuing market and let it find its level based on the true value of what was being bought and sold. We are in an emergency largely because they failed to make their case with sufficient force.

Which brings us back to Barack Obama. The above-cited legislation, co-sponsored by Sen. McCain could very well have knocked the blocks out from under the noxious financial follies which have landed us in this quagmire. According to Wallison, however, it met with terminal resistance from some telling sectors:
In the summer of 2005, a bill emerged from the Senate Banking Committee that considerably tightened regulations on Fannie and Freddie, including controls over their capital and their ability to hold portfolios of mortgages or mortgage-backed securities. All the Republicans voted for the bill in committee; all the Democrats voted against it. To get the bill to a vote in the Senate, a few Democratic votes were necessary to limit debate. This was a time for the leadership Sen. Obama says he can offer, but neither he nor any other Democrat stepped forward.

Instead, by his own account, Mr. Obama wrote a letter to the Treasury Secretary, allegedly putting himself on record that subprime loans were dangerous and had to be dealt with. This is revealing; if true, it indicates Sen. Obama knew there was a problem with subprime lending -- but was unwilling to confront his own party by pressing for legislation to control it. As a demonstration of character and leadership capacity, it bears a strong resemblance to something else in Sen. Obama's past: voting present.

Indeed. Unlike John McCain, who has a long track record of irritating the hell out of his own party by taking the lead on issues which go against its orthodoxies, Obama has consistently squandered opportunities to demonstrate a similar degree of moxie. His lock-step adherence to the most liberal and doctrinaire policies of the Democratic Party have shown him to be far more of a joiner than an pioneer, and we are all now paying the price for his and his Democratic cronies' lack of vision.

(Note: portions of this post are lifted shamelessly from an email exchange with friends last week. Lazy? Sure. But why re-invent the wheel when I'm on a roll)

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