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Monday, October 20, 2008

Enough Villains for Everyone

This financial crisis has a villain to suit every political viewpoint, enough to make pundits of every stripe happy. Republicans are to blame, as are Democrats. Rich people are to blame, as well as poor people.

The most obvious target has been George W. Bush, under whose watch our economy fell apart. Presidents almost always get too much credit or blame for the economy. Economies tend to be huge, independent-minded beasts with cycles of their own, and usually pay scant attention to the machinations of whoever happens to be dwelling at 1600 Pennsylvania at the time. For instance, Clinton was given credit for erasing the deficit, though that was later demonstrated to be pretty much entirely a function of the higher tax receipts occasioned by the tech bubble. I'll go even further out on a limb here and say that the Fed Chairman himself has less to do with economic cycles than usually thought, though he usually has more control than the President. (Speaking of which, Fred Chairman Bernanke was snoring away at the wheel dreaming of inflation well past the point where a dangerous, Depression-era-type deflation was a strong possibility.)

In fact Bush does bear part of the blame for the current mess, if for no other reason than that he appointed Christopher Cox head of the SEC. In 2004, Cox rescinded the uptick rule, which stated that stocks could only be shorted on an uptick (and thus prevented large shorts from driving down the price of a stock via their superior firepower/deep pockets). He also changed the capital ratios so that the investment banks, instead of merely having $12 in equity for every dollar they actually owned to $30. Think about that for a moment. You know how you're constantly warned not to invest on margin, i.e., borrow against your stock to buy even more stock? The most that any of us as individuals can borrow is 99% of our collateral, i.e., have $1.99 of stock for every dollar we own. And having that much is usualll considered playing with fire. But the investment banks could carry thirty times their net worth, meaning, their assets had only to decline roughly three percent before they were totally wiped out. So Bush, through Cox, does bear a substantial portion of the blame.

What kind of person allows his investment bank to get leveraged to the tune of 30 to 1? Someone who is extremely greedy, who is terrified of losing market share, and who worries that his bonus this year may not be as much as the next CEO's. In other words, every CEO on Wall Street. In their thirst for today's profits, virtually every one of them forgot about the lessons of yesterday (ever heard of Long Term Capital?) and the risks of tomorrow. But in the faux-macho culture of Wall Street, taking financial risk -- almost always with other people's money -- is how you prove your masculinity.

Remember all the publicity about redlining, the practice of doling out mortgages in such a way that minorities ended up with fewer of them? The Community Reinvestment Act of 1995 was created in order to put a stop to this. But there was one little hitch. In order to accomplish this, they had to ask the mortgage banks to lower their lending standards, stop paying attention to such pesky details as credit records, job histories, and the like. The CRA had Democratiic fingerprints all over it, but President Bush did not help matters when in 2002 he announced that it was his goal to get 5.5 million more minority families into houses in the next ten years. Thus, the subprime disaster was born. And even worse, once subprime mortgages became accepted practice, plenty of white people horned in on them as well, and plenty of fairly well-to-do white people at that, every last one of them taking on more house than they could afford, completel confident that the housing boom would never end.

Fannie Mae and Freddie Mac did their best to keep the disaster on track by hiring lobbyists to kill any legislation intended to rein them in. Among these lobbyists is the man who is in charge of John McCain's Presidential campaign. And the second largest recipient of campaign contributions from the two agencies is Barack Obama. When McCain tried to introduce legislation calling for stricter oversight in 2005, guess who killed it? Barney Frank, one of the heroes of the bailout, who said at the time that tightening lending standards would just be an excuse to cut lending to minorities.

There's virtually no one who's been in power in the last ten years whose hands are completely clean. Remember "Murder on the Orient Express"? (In Agatha Christie's book, every single passenger on a certain car has a motive for -- and a hand in -- murdering the evil man whose corpse turns up on the train.) This plot is not dissimilar.

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