Thursday, September 18, 2008

Laissez-fair consistency

Not too long ago, we bailed out the financial institutions who gave us the "Savings & Loans" fiasco. After these lenders allowed people to get loans without the usual scrutiny, the government had to take over the mess. Final cost to the taxpayers was 70 billion dollars. It was a failure to properly regulate the financial industry. The ENRON et al scandal again showed that because there was not enough accounting regulations, large corporate firms took full advantage and caused some serious financial scandals. The current financial crisis is once again a direct result of the financial regulators falling asleep at the switch, if they were ever awake in the first place. To illustrate the latest calamity, I can imagine some poor retired senior in a shack in Kentucky was told that even though he does not have a job and can't afford a loan, he can have it anyway. Besides, his shack has been increasing in value over the last few years along with all real estate nationwide and as such his equity over time will allow him to replace his loan with a lower fixed rate. So the senior takes a $50,000 mortgage and fixes up the shack. A year or two later, the somewhat improved shack is suddenly worth way less than before the improvements.
The result: The old man, who can no longer afford the adjustable mortgage which has doubled, loses his house as a result of foreclosure. The mortgage representative has earned a tidy commission and so did the local bank, who managed to re-sell the loan to a mortgage consolidator who, in turn, groups these loans and gives it a fancy sounding name (structured equity security) and re-sells it once again. The winners: predatory lenders. The losers: the old man sans shack and the rest of us when our governments have to make good for these loan guarantees which will have a huge default rate.
Our governments should be more consistent in the application of their "laissez-fair" style economics. Just the way they failed to regulate, they should now NOT bail out the failing financial institutions. This is the only way our politicians will be held to their duty to do their jobs and not rely on the lobbyists who finance their re-elections. The same lobbyists that wind up to be the winners each time there is a financial catastrophe. I get sick to my stomach when I think of this cyclical economic betrayal by those politicians and special interest groups that find the loopholes and cash in. Like kids within reach of the cookie jar they never fail to disappoint.

3 comments:

Renegade Eye said...

Really good post.

As you travel blogdom, you'll find the mess blamed on one party, or the other. The loosening of bank regulation, happened under Clinton's watch. The legislation was written by Republicans.

roman said...

ren,

Thanks.

Correct. This crisis cannot be blamed on either party. Both are equally culpable. Generally, it is special interest and politicians from both sides of the aisle, that are profiteering on the backs of their constituants.

Renegade Eye said...

Most on the left, wouldn't realize the disapproval on the right, of Paulson etc.