Third Party & Independents Archives

The Moral Hazard That Shaped Elizabeth Warren

Massachusetts Sen. Elizabeth Warren may just be Hillary Clinton’s worst nightmare if the former law professor and expert in bankruptcy and personal finance chooses to run in 2016. Hailed by the (very) liberal wing of the Democratic Party, she has so far played it coy and denied any ambition; all reminiscent of Obama around 2006. Time — Oh yes, and the polls — will tell what she decides; but in looking at who she is and how she got there, one is struck by how far she has moved from what used to be a rather conservative stance.

Her youth was not easy; a sick, working class father meant she was already working as a waitress at a young age while honing her debating skills in high school. University, marriage with kids, divorce, as she earned her law degree, and a rising profile in the academic world all followed. Then came bankruptcy; not the personal kind, but rather her advisory role to the National Bankruptcy Review Commission in 1995.

This was around the time she stopped calling herself a Republican. She and others opposed legislation restricting the right of consumers to file for bankruptcy and of course lost that battle with the passage by Congress of the Bankruptcy Abuse Protection and Consumer Protection Act in 2005.

By this time, one suspects she was already firmly in favor of a deeply regulated financial industry, so when Harry Reid appointed her in late 2008 to chair the Congressional Oversight Panel that dealt with the bailouts handed to players in the banking and insurance industries, Elizabeth Warren had found her home so to speak. That's a long way from someone who used to vote Republican because "those were the people who best supported markets."

Somewhere in all those committee briefings dealing with bankruptcy Elizabeth Warren seems to have forgotten the hard choices that shaped her life as she worked her way, in part at least, through the education system ending up near the top of academia. Or did she decide that people should not have to bear the consequences of their actions, having dealt admirably with her own challenges? Economists define Moral Hazard in a number of ways but one way to think of the term is to imagine a situation where a person or institution does not have to pay -- at least not in full -- for the consequences of their actions. To oppose a reasonable tightening of bankruptcy law, as Warren did, is to oppose any attempt to lessen the Moral Hazard involved in our financial lives. That leads inevitably to greater risk taking in the future as folks realize they can get away with those unpaid credit card bills or banks realize that they are indeed, too big to fail. What kind of a financial system would we have in Elizabeth Warren's perfect world? How freely would capital flow to the innovators and entrepeneurs after wending it's way through an even greater maze of restrictions and requirements? Is increased regulation the way forward for our financial system? Or is the financial industry way more careful with the credit it dispenses because former Secretary Paulson, (in part he had no choice), let Lehman Brothers go under? As the Fed tapers it's bond buying and markets try to decide where interest rates really should be, Senator Warren might recall the resourcefulness she had to display early in her life and show more faith in individuals and less in the nanny state whose role in our lives she would love to increase.

Posted by AllardK at May 6, 2014 3:55 PM
Comments
Comment #378215

If anything, Elizabeth Warren has not forgotten the financial struggles of her youth.

Posted by: Rich at May 6, 2014 5:07 PM
Comment #378216

Does Goldman Sachs pay you to spout this drivel? Probably not.

You know a few details about Warren’s biography, but nothing about the person. She is not “playing it coy” and “denying any ambition” about running for president. She has made it abundantly clear she will not run and she has made no moves whatsoever to put together the organization necessary to do so. Furthermore, she is not an ambitious person. It is simply not in her. She lacks the kind of personality it takes to run in the first place. Obviously you do not know that Warren had to be pushed into running for the MA Senate after the GOP blocked her nomination for the CPFB. The seat was more or less handed to her. Someone else will have to hand the VP slot to her, because she will not do anything to go out and get it for herself.

Are you seriously arguing the financial sector is under-regulated? Really? That is a joke, right?

Does anyone believe for even one second that the financial sector “is more careful” and fears the kind of moral hazard that resulted in Lehman Brothers capsizing?

Lehman Brothers was allowed to fail as an act of revenge. The Bush administration blamed Lehman- a smaller and therefore notably more aggressive investment bank than the others- for manipulating oil markets, and running up oil prices in a big way. That run-up spurred commodity-fueled inflation, which in turn forced the federal reserve to increase interest rates, which in turn sent the housing market into a nosedive.

The economy crashed because the Bush administration failed. It crashed because the Federal Reserve failed to carry out its primary mission, and maintain order in the financial markets. It failed because deregulation- the CFMA amendment added to the 2002 budget by conservative Republican Phil Gramm preventing government oversight of commodity markets, and the repeal of Glass Steagall in 1998- created a situation in which firewalls between insurers, investment bankers, and commercial bankers no longer functioned, while investment banks developed tens of trillions of financial instruments surrounding mortgages. They developed them for the fees, and shadow banking traded the instruments in the dark, without the benefit- the benefit- of oversight.

Warren was not allowed to run the CPFB because those piece-of-crap conservatives who brought this country to its knees wanted to protect the financial sector, and allow it to continue fraudulent actions with mortgages and mortgage derivatives.

“How freely would capital flow to the innovators and entrepreneurs after wending it’s way through an even greater maze of restrictions and requirements?”

Adequate efficient distribution of capital was achieved decades ago, and indeed, more friction is desperately needed for financial instruments.

Posted by: phx8 at May 6, 2014 5:27 PM
Comment #378219

Well said, px. Allardk, touting Warren is a non sequitur anyway, IMO. Hillary will be the one and only big bang for the Corpocracy this time around as she and Bill are well vetted by the Corpocracy on major issues like immigration, globalisation and so on - - -

Otherwise - - -

Posted by: roy ellis at May 6, 2014 8:26 PM
Comment #378666

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