Democrats & Liberals Archives

Another Deregulation Disaster

Eight years of Bush-Cheney have given us ample proof that simplistic allegiance to the mantras of free market fundamentalism give way to economic disaster. As Henry Paulson, pragmatic Treasury Secretary, moved to have the government take control of mortgage lending giants Fannie Mae & Freddie Mac, it is harder and harder to defend privatization and deregulation as the cornerstones of sound economic policy.

Of course none of this stopped most Republicans at their recent convention from acting like they still carry the torch for smaller government and freer markets. Economic ideologues steeped in the language of the supremacy of the market over government controls aren't likely to admit that blind adherence to their philosophy by so many since the Reagan years has cost us dearly.

I'm sure we will continue to hear about the evils of "burdensome regulations" proposed by Democrats and liberals. Conservative Senator Bunning of Kentucky amusingly called for the resignations of Paulson and Federal Reserve Chief Ben Bernanke, saying "they have taken the free market out of the free market." Bunning has clearly sipped too much of the free market fundamentalism Kool-Aid.

But don't misunderstand. There IS plenty to criticize in the Paulson plan. Senator Obama while he generally supports the plan, expressed concern that we "not allow government intervention to protect investors and speculators who relied on the government to reap massive profits." Economist Max Fraad Wolff speaking on Democracy Now! this morning pointed to the government assumption of risk without fully taking over the institutions, and the likelihood that the government will end up taking on the role of a collection agency, gathering debt from homeowners to pay off debt to investors, foreign and otherwise. The help for struggling homeowners is meek in comparison. He offers a quick history lesson, and some amusing insights into Governor Palin's comments about Fannie Mae and Freddie Mac. It is definitely worth a read.

Make no mistake that regulations can be burdensome. Often the mega-corporations which write them make them unnecessarily complicated, disadvantaging smaller firms who might want to compete. But if you are still convinced that deregulation and privatization are always necessarily better, let's review some recent troubles which had their genesis in deregulation:


  • Sub-prime lending

  • Wall Street investment scandals

  • Media consolidation

  • Enron, Tyco, WorldCom, etc corporate scandals

Yes, of course, there were also criminal acts involved in many of the corporate scandals, but deregulation allowed so much wrongdoing to go on legally, that disaster was simply bound to happen sooner or later.

Our economy is complicated. We need the best and the brightest conferring to determine the role government can play in regulating markets sanely. Not with some ideological pablum whether from the Heritage Foundation or the Socialist Labor Party.

America should be ready for some sane re-regulation. Regulation which allows markets enough freedom to flourish, but denies corporate bosses the authorship of all the rules. There is no reason that regulation can't be both stronger and less complicated. First we need to check the influence of lobbyists.

Fortunately both Presidential campaigns have decried the influence of lobbyists. I'm more inclined to go with Obama who has refused lobbyist money, than McCain who has former lobbyists as key campaign staffers. I understand that it's not all black and white. Obama's campaign is not void of lobbyist influence, and McCain has on occasions stood up to lobbyists. But on balance Obama will have less campaign obligations to lobbyists, and McCain may have significant blind spots where the former interests of his staffers are concerned. I'll hope for the best regardless who wins.

More importantly, America needs to turn the page, and say good bye and good riddance to the failed mantra of deregulation for deregulation's sake.

Posted by Walker Willingham at September 9, 2008 9:34 PM
Comments
Comment #262391

The way the organizations were set up to exist in the first place was the cause of the disaster. That was why Freddie Mac was started, because of how Fannie May was working out.

Allowing an organization to have such a huge advantage on every other private organization and then allowing the board to be filled with people as political paybacks because it is a governmentally backed institution is a bad idea.

And it is exactly the type of management that has gotten us in trouble in the healthcare industry and a similar solution that will ultimately fail that is being presented. Politicizing an organization instead of regulating and monitoring an organization will always lead to this. Making a market not free will make it fail its purpose.

To attempt to lay this soley all at the hands of the Bush administration is, while typical, not seeing the big picture. Especially since congress has done nothing in the past year and a half to fix it either, Walker.

Posted by: Rhinehold at September 9, 2008 10:06 PM
Comment #262396

Walker,
Good article. I appreciate your effort to approach the topic as even-handedly as possible. The failures of Fannie Mae and Freddie Mac are disasters of the first order, but I’m pretty sure most people don’t understand what happened. Everyone can see that real estate is declining, the value of their home is falling, that homes are not selling, that ‘For Sale’ signs hang on lawns month after month. That’s bad enough.

What happened is much worse. The failures of the two organizations, which make up half of the mortgages in the US, are being publicly advertised as costing a mere $30 billion or so, but the number that’s floating around is more like $100 billion each. That will be on top of the $407 billion budget deficit number that just came in.

This situation leaves us without choices. Barnancke and Paulsen are making the only viable choices presented to them. Letting Freddie Mac and Fannie Mae fail are not options, since that would certainly result in a depression rivaling 1929. In addition, foreign investors have hundreds of billions each invested in bonds. While it might be acceptable to stick it to the stockholders, there is absolutely no way that we can stick it to the bondholders, especially foreign governments.

Now we’re waiting for the next shoe to fall, namely one or two large banks. A couple names are already being floated, and their failures will be big enough to collapse the FDIC reserves. Of course, the US government will have to bail them out, too.

The unwise Bush tax cuts, the War in Iraq paid by borrowing, the GOP Congress spending, the GOP Congress filibustering the Democrats for the past 18 months, resulting in nothing but continuing resolutions on the budgets, outsourcing of jobs and the failure of job creation in the US, artificially low interest rates so as not to imperil a recovery that was, sadly, built upon borrowing and debt: this is what brought us to this point.

And make no mistake, we’re all in this together.

It’s funny how much the end of the American Empire resembles the end of the USSR empire.

Posted by: phx8 at September 9, 2008 10:32 PM
Comment #262400

Rhinehold,

Certainly the problems I list are more than eight years in the making, and they are multi-causal. But front and center is a blind faith in the free hand of the market by adopters of a simplistic ideology which has had a dominant influence on our governance since Reagan became President. Clinton bowed down before its laurels as well, though with a bit more nuance. I suspect Adam Smith would be appalled at the dumbed down misappropriation of his ideas to support government’s abdication of its responsibilities. But I don’t claim to be an economist, just a layman who can comprehend that one-dimensional solutions to a multi-dimensional problems are unlikely to give us long-term stability and prosperity. Bush’s incuriosity is symptomatic of the long-term disasters which came to fruition under his watch. I never claimed that he did it alone.

Posted by: Walker Willingham at September 9, 2008 11:13 PM
Comment #262401

Oh, are we pretending now that the Democrats had nothing to do with deregulating Freddie and Fannie?
Are we pretending the Democrats didn’t make tons of money from them?
You need to further familiarize yourself with this subject Mr. Willingham. This was a bipartisan fuckup.

Posted by: H.H. at September 9, 2008 11:19 PM
Comment #262402

Walker,

So is the blind faith that politicians running an organization within a free market keeps that market free and regulatable. By giving an advantage to these two organization it ensured that they would ‘own’ the majority of their market, and while government has strong position in regulating other businesses, it is woefully inadequate of regulating itself. So once they enter into the marketplace, they create entities that squash competition and are inheritely corruptable and influencible.

The takeover is necessary, but it must be temporary and as a result should ensure that the organizations don’t exist like they do now going forward, otherwise we will just have another repeat down the road.

And all I ask is that we remember that part of the lesson when we start thinking about getting into the healthcare industry a little bit more than we already are, effectively doing the same bad things.

Posted by: Rhinehold at September 9, 2008 11:36 PM
Comment #262404

Walker good article. Lets not forget to add (to your list)the deregulation of the Commodity Exchange Act which led to the $4+ gas we enjoy today.


http://www.globalresearch.ca/index.php?context=va&aid=8878

Posted by: j2t2 at September 9, 2008 11:42 PM
Comment #262407

Absolutly

That is only part of the picture however. The right’s mantra about free markets is a hoax. What they mean is free markets for capital only. If markets were truly free then we should take the handcuffs off the labor movement by repealing the Taft-Hartly amendments to the Wagner Act. If wages had been allowed to increase anywhere near the increase in production levels,as historically happens, there would be no morgage crises,there would be credit card crises(thats next), and the deficit would be much smaller. Instead wages have been purposly kept down through anti-worker trade,tax, and immigration policy, the appointment of anti-union shills to the labor board and a thousand other anti-worker edicts by a regime convinced that every thing will be just ducky when rich people finally, finally, have all the money. The results are obvious.
We are about to hear a lot about just how wonderful nuclear power is, especially if Mac wins. The proponents will often point out that France provides 80% of their power from nuks with an excellent safety record(so far). What they will not tell you is that the French system is 100% socialist. There is no incentive to cut back safety inspectors or hide their reports to please stockholders for that quarter, etc. The US government has ALREADY agreed to assume the horrible liability for new plant construction and assumed the burden of dealing with the waste. We get the risk while the oligarchs get the wealth. Free market indeed.

Posted by: BillS at September 9, 2008 11:57 PM
Comment #262409

BillS,

And your solution is?

Posted by: Rhinehold at September 10, 2008 12:09 AM
Comment #262410
The proponents will often point out that France provides 80% of their power from nuks with an excellent safety record(so far). What they will not tell you is that the French system is 100% socialist. There is no incentive to cut back safety inspectors or hide their reports to please stockholders for that quarter, etc.

And Russia was a free-market paradise. Chernobyl didn’t happen because government beauracrats were pushing the workers to get the testing done, causing them to turn off alarms that were sounding, warning of an impending disaster. It wasn’t built by people looking for a cheaper solution than the ones the United States plants were made out of.

Nah, just didn’t happen. Nevermind I said anything.

Posted by: Rhinehold at September 10, 2008 12:24 AM
Comment #262412

Rhinehold,
Fannie Mae and Freddie Mac ate many of the bad mortgages that private banks created in the free market. They were not particularly corrupt. They did not squash competition. They were just the next row of dominos to fall.

This is a slow motion crash. It’s not like the stock market. The destruction of the credit market takes longer, because it is much, much bigger. The sums of money are enormous. It takes longer to develop, it’s slower to be recognized, it goes deeper than expected, it lasts longer, and it takes longer to recover.

There are more dominos to fall. Although the slope is relatively shallow, the momentum behind the fall is huge. Lehman is about to go, and probably one or more large banks will go down. This will collapse the FDIC, which will require yet another bail out.

That’s why I think most of what Obama and McCain say about the economy won’t matter. They’re not being dishonest. Most people know the economy is bad, but they are trained by past downturns to think this will be another typical recession. It’s not. Obama and McCain don’t have a choice. We are deep in debt, and getting deeper, and foreign governments own so much of our debt that they will not allow us to inflate out way out of it.

Posted by: phx8 at September 10, 2008 12:58 AM
Comment #262413


My solution, apply antitrust lawa to the corporations and bust them up into smaller companies. This will create more competion, more jobs and reduce the influence on the government.

In addition, I would suggest we fire the entire Washington gang and start over with new politicians, preferably people who have never been politicians.

Every voter that votes for Mickey Mouse for president will be doing their country a service.

Posted by: jlw at September 10, 2008 1:32 AM
Comment #262421

The privatization of Fannie Mae and Freddie Mac extends to Nixon and a Democratic Congress. The further worsening of their situation extends from 1989 with FIRREA to Bush I and a Democratic Congress. NINJA loans are all Bush II.

I am not categorically opposed to privatisation or even deregulation, but it has been little more than political pay off politics, as done in the past 15 to twenty years.

This is the main reason I decry the often touted Libertarian de facto Laissez faire stance.

Posted by: googlumpuugus at September 10, 2008 8:38 AM
Comment #262423

I agree that Bush has carried this free market thing further than past presidents but as stated here democrats hands aren’t clean either. As for gov’t not being able to regulate itself-this maybe true-but that is the American citizens job-oh but wait-we have fallen down on this job. We are too busy watching American Idol or listening to Rush or Bill or drooling over the lastest John McCain Barbie Doll.

Since Americans in general seem disinclined to monitor the gov’t, I will settle on the gov’t monitoring itself. I think Bush has proven that corporations can not be moral and do the right thing and therefore need for someone else to monitor and regulate them.

Posted by: Carolina at September 10, 2008 9:16 AM
Comment #262430

phx8,
You wrote, “Fannie Mae and Freddie Mac ate many of the bad mortgages that private banks created in the free market. They were not particularly corrupt. They did not squash competition. They were just the next row of dominos to fall.

First, this statement ignores the “redlining” crap foisted on the industry on the ’90s. It was CLINTON administration people who raised the minimum percentages of loans that were to go to “underserved” (read unable to pay) communities. During this period of time the load of loans being bought up by Fannie and Freddie which were in danger of default from the get go went from 1.4 billion or so to well in excess of 14 billion.

Second, under this pressure to create loans that were always worthless, banks never intended to keep their loans themselves. Fannie and Freddie, because they were super huge and had this implicit backing of the federal treasury, could buy money at below-market rates and thus be used as a dumping ground for toxic credit. Had anyone really thought the corporations COULD be allowed to fail, nevermind that they would be so allowed, they could not have gotten the cheap money to guarantee these worthless crappy loans. To say they didn’t “squash competition” is simply a socialist way of whistling past the graveyard. They never had to compete at all because they had the “full faith and credit” of all the money the government could steal from us to cover up the implicit failure to be a market-based entity at all.

Fannie and Freedie were never free-market creatures. They were a Frankenstein-like cobbling together of the worst of both worlds. Huge and inflexible and beureaucratic like government, with government’s capacity to rob the populus to get capital, these megacorporations were able to control so large a portion of the mortgage market that, were they allowed to fail they could take the whole private economic infrastructure down with them. At the same time they were never beyond the reach of political influence, both Republican and Democratic (60% of funds given to “charitable” causes by the corporations went to Democrat-leaning groups)

Not particularly corrupt?!? The whole idea of these confabulations of the market place was the very essence of corruption!

Posted by: Lee Jamison at September 10, 2008 9:46 AM
Comment #262465

Lee,
Fannie Mae and Freddie Mac worked just fine until recently. The seeds of the failure may have been planted in 1998 when Glass Steagal was repealed, thanks chiefly to Gramm, but in any event, home ownership numbers remained consistent throughout the last decades of the 1900’s, and only began to change dramatically under the Bush administration. Remember how the only talking point the Bush administration could present about how the economy’s success was the increased number of homeowners? It only increased by about 3%, but as we now know…

This is yet another poster child illustrating the weakness of the capitalist system, with its boom/bust cycle, an inevitable part of the process of privatization and deregulation, with profits privatized, and losses nationalized.

So sorry, Lee, but we’re not going to allow the free market to take us into the bust portion of the cycle ala 1929, not if we can help it.

Posted by: phx8 at September 10, 2008 11:12 AM
Comment #262477

To me, it goes back to the good-old eighties…Reagan and Sam Walton…together they busted the back of Unions, thereby taking ‘free’ out of free market, and deregulation to the point all business became unsupervised. Left to its own devices business capitulated to corruption, and with no negotiation power labor became less than slaves. What a train ride those two senile old bastards put us on.

I’ve got an idea…let’s elect John McPain…that oughta fix us right up.

Posted by: Marysdude at September 10, 2008 11:43 AM
Comment #262680

The anti union people are also anti social security, except when they are receiving benefits from it. People who are on fixed incomes will need to do some zero based budgeting, as the current economic problems will be continuing.

I’m pleased to see Phil Gramm’s name spelled right for once. There’s an article in Mother Jones on that

http://www.motherjones.com/

Posted by: ohrealy at September 11, 2008 3:30 PM
Comment #263345

Socialist Roots To Mortgage Crisis (1968 - Dems)
The American Dream of home ownership ran into the well intentioned but misguided fanaticism of socialist support of that effort through governmental policies to support that dream for all. This was done despite the fact that not everyone is responsible enough to own and maintain a home. The banking system, as a long germ gatekeeper of home ownership, figured that out long ago. Not satisfied with the workings of the free market Congress created entities such as Fannie Mae and Freddie Mac to increase the percent of home ownership and even some States followed suit with smaller entities of a similar purpose.
Such socialist economic policies that distorted the housing market in this country. This well meaning effort to aid those that wanted to buy a home and a piece of the American Dream, they created Fannie Mae and Freddie Mac decades ago. This piece of socialist economics influenced lowering loan requirements and artificially pumped money into the housing market for decades.
When Congress then privatized the program and encouraged the free market to support this two headed beast, along with State privatized entities of a similar purpose, they entangled the private market (AIG, Merryl Lynch, etc.) in the mess as well. In the end, those who were encouraged to aid and abet that program are now suffering the consequences of the housing bust.
Socialism is the root of all evil in this mortgage crisis. We need to hold those who hold dear to socialist economic policies responsible and vote them out of office. There is no free lunch and shame on any of us who knowingly voted for fools who promised things that were too good to be true.
FDR helped found FAnnie & Freddie and in 1968 it was deregulated by his party. Don’t rewrite history

Posted by: Deregulated in 68 by Dems at September 18, 2008 12:38 PM
Comment #263461

Bush On Fannie Freddie Reform
From his State Of The Union Address in January 2008, “My administration brought together the HOPE NOW alliance, which is helping many struggling homeowners avoid foreclosure. And Congress can help even more. Tonight I ask you to pass legislation to reform Fannie Mae and Freddie Mac, modernize the Federal Housing Administration, and allow state housing agencies to issue tax-free bonds to help homeowners refinance their mortgages. These are difficult times for many American families, and by taking these steps, we can help more of them keep their homes.”
Our President plead with Congress for reform and got none in the 8 months since then.

Posted by: smokey at September 19, 2008 8:16 AM
Comment #268252

Deregulated in 68 —- If socialism is the evil, then why have we just nationalized several major banking institutions?

Apparently you should be voting for obama, since the republicans just made the largest lurch towards socialism in the united states for decades.

Posted by: Joshua Rodman at October 24, 2008 10:19 PM
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