What to do
It seems clear that most Democrats (and at least for a few weeks John McCain) believe that the federal government should regulate the financial sector. But to what end?
Everyone should know that setting the goals of regulation is not only the first step, it is the hardest step. So what would be the goals of regulating banks, or insurance companies, or investment banks, or mortgage lenders?
Is there a chance in the confusion and calamity to encourage savings in America? Is there a way to empower lending for productive and important new facilities, like the green energy grid and new transportation and communications networks we so badly need to leave for the next generation? Should we continue to push for single family home ownership, bending many policies toward this end? Should we again encourage banks to make risky loans in return for high rewards, so as to benefit their shareholders in good times and at least in some cases to promote ground-breaking entrepreneurship? Or can we limit such practices without harming our economy? How do we distinguish the pernicious ersatz securities from asset-backed paper? Should we arm-twist investment banks into merging with banks, or is it better to leave Goldman and maybe Morgan as the dominant firms in that sector? I could go on.
At least it should be clear that (1) giving a trillion dollars of taxpayers' money to banks, and tens of billions to the other bailed-out firms, ought to give the taxpayers' representatives the right to answer to these questions (call this a policy swap: money for regulation), (2) the questions should be openly discussed for a good while before decisions are made, and (3) if John McCain were elected President, we should fear that no good regulatory framework would survive his veto, or if passed would overcome the bad acts of the people he appointed to manage the regulatory agencies.
A closing note: far less than a trillion dollars of taxpayer cash would suffice to fund the public works projects that could end forever our national dependence on carbon-emitting energy, without raising the cooling, heating or transportation bills for any of us.
You ask some excellent and challenging questions. But in my neighborhood, the homeowners cannot agree on where to install the new mailbox cluster to replace the old one that is falling apart. The battle has raged for a year and nobody will agree.
So how are you going to build a bi-partisan consensus on what are highly technical financial issues? How will you hold the public interest? How will you prevent the foxes from gaming the system like they always do, with exceptions and loopholes? You are talking about creating a whole new game.
If fancy mortgages that reset their rates had been outlawed; If you had to have a 20% down payment; if there were serious penalties for not performing due diligence on all transactions, for the broker, for the credit rating agency, for the bond creator, and some rules about the financial requirements for prospective borrowers--then probably the whole debacle could have been avoided.
But now that the horse is out of the barn? I see a mighty tower of Babylon, fallen down, and the pride of Man broken in the dust again.
I don't see peace, love, and understanding on this issue any time soon. I see partisan warfare.
September 20, 2008 5:56 PM | Reply | Permalink
Let the partisan squabble begin forwith. You really do not know how it will turn out but it is certain that if no attempt is made to re-institute regulation and to prevent further excessive concentration of power, then you have a certain outcome. You have seen plenty of evidence that the status quo does not work. If you've been around for the past few decades, you've also seen regulator schemes that did work dismantled and bad things happen.
It may take a decade or two to sort things out. Why wait?
It is not war. It is how democracy is supposed to work.
This is a good issue to start with. I'm not seeing much support for this "plan" to set up a branch of Goldman Sachs in the White House. All Congress has to do is to help real people with real problems. This is a financial mess. It will take time to unravel and oxen will get gored, e.g., the "We're bullish..." folks. They are not the most important segment of the economy.
September 20, 2008 6:16 PM | Reply | Permalink
I agree. No Goldman Sachs in the White House. I thought from the beginning that if we were going to try to wade in, we should have set up a corporation to refinance mortgages that were in trouble to eliminate the fancy baloons' and provide flat fixed rate loans at rates that were affordable. If banks had been willing to do that when the whole mess started--none of this would have happened. But when they sold the mortgage, and it was bundled into tranches, turned into CDO's and sold overseas--who do you go to to refinance your mortgage and work out terms--so there was nothing to do but default and forclose. Who would want such an outcome? It serves nobody.
But we still can't get people to accept reponsibility for the part they played. And when John McCain is trying to blame the whole mess on Obama--well the train has left Reality station, destination La-La Land.
September 20, 2008 6:31 PM | Reply | Permalink
Dean Baker's proposal is a good start. I think that people, particularly young people, have to assume that fixing this mess will take a long time--and I do not just mean this particular mess. It took a long time to create.
If anyone wants to bone up on the economic aspects, check out Levy Institute. They have a very recent paper href="http://www.levy.org/vdoc.aspx?docid=1085">What's a Central Bank
to Do?
There is a learning curve on the economic issues. We have whole generations exposed to a lot of fine sounding gibberish. Those who spout it have done very well at the expense of everyone else. You bet they are not want to give up the loot and will affect the political process.
I'm not looking for any miracle or quick fix. If you are under 40, you are going to be around for a long time and you need to start making it work for you now. Think about it that way.
September 20, 2008 9:41 PM | Reply | Permalink
Good points, DT. I agree this will take a long time to unwind. The current "crisis" is one thing; the real problem is much more fundamental and will take years, maybe decades, to unwind.
I think the word you want here is "wont".
http://dictionary.reference.com/browse/wont
-- ARG
September 20, 2008 9:55 PM | Reply | Permalink
Yeah, you'll see "partisan warfare" all right, if by "partisan warfare" you mean "the Democrats sign off almost unconditionally and then engage in retroactive criticism of the legislation designed to make it look like they didn't really sign off unconditionally."
September 20, 2008 11:09 PM | Reply | Permalink
Hmmm, encourage savings? Seems to me that the big problem is that life is full of necessary expenditures that people are forced to pay for with post-tax dollars. Let's face it, policies that encourage savings favor rich people who have money to save. If you want to help real people you need to make expenditures for transportation, rent, utilities, food and clothing tax deductible. Of course, we can't afford to do that and such deductions would be abused to no end but in an era where the federal government can buy an insurance company in my name but not use that company to provide me with free insurance, anything goes. So the issue shouldn't be savings. The issue should be... why should I be taxed on money that I use to pay my electric bill?
September 20, 2008 6:41 PM | Reply | Permalink
SAVING ACCOUNTS ARE YOU OPEN AN ACCOUNT WITH A BANK... HAVE A TIME OF ENTREY & EXIT, I. E. ONE YEAR C.D. CERTIFICATE OF DEPOSIT, PAYABLE AT 2.5% APR... INSURED BY UNCLE SAM UP TO $100,000.00 DOLLARS... IF YOU ARE TRYING TO MAKE MORE THAN THAT, YOU ARE GAMBLING... AS FAR AS I AM CONCERNED, IF YOU WANT TO GAMBLE, GO TO A CASINO, YOU HAVE BETTER ODDS, THAN WITH ANY HEDGE FUND OR INVESTMENT BANKERS... FIRST OF ALL EVERY SO CALLED INVESTMENT BANKERS, ARE ALWAYS PLAYING WITH OTHER TYPES OF THE SAME ELKE... WE ARE SMARTER THAN THE DUMB LITTLE PEOPLE... THEY MAY BE RIGHT, HOWEWVER, I WILL BET THEM A LOT OF MONEY, IF THEY WILL USE THEIR OWN MONEY, & PAY OFF WITH THEIR OWN MONEY, NOT SOME ONE ELSE'S MONEY... CAN YOU SEE HANK PAULSON LOAN MERRILL LYNCH OR J.P MORGAN "HIS OWN MONEY"??? HELL NO... ALL THE GOVT. HAS TO DO TO PUT ALL OF THE HEDGE FUNDS & INVESTMENT BANKERS OUT OF BUSINESS IS TO HAVE THEM GUARANTEE THEIR LOANS WITH THE OWN ASSETTS... PERSONAL, NOT LLC OR CORPORATION... NOT ONE OF THOSE BIG SHOTS WILL GAMBLE ONE CENT, IF THEY HAVE TO RISK, THEIR AFTER TAX DOLLARS... EVEN IF SOME CRAZY BANKER WANTER TO, HIS WIFE WOULD BEAT HIM OVER THE HEAD, IF HE LOST THEIR HOME ON LONG ISLAND... WISE UP, AMERICA... DO NOT DO BUSINESS WITH SOME ONE THAT WILL NOT AGREE TO PERSONALLY GUARANTEE YOU WILL AT LEAST GET YOUR MONEY BACK... THE MOST YOU COULD LOSE IS YOUR PROMISED INTEREST... THAT WAY IT IS A SAVING PROGRAM, OTHER WISE YOUR ARE GAMBLING... BOB VARNER
September 20, 2008 7:45 PM | Reply | Permalink
Okay crazy guy... you almost refute your own points. 2.5% a year isn't enough of a return for most people. So "gambling" is all that's left. That isn't right, it needs to be fixed.
Working people deserve two things -- their purchasing power should increase as they get on with their careers and they should be able to retire comfortably when they're done working. Those should be considered rights. 2.5% won't do.
September 21, 2008 12:04 AM | Reply | Permalink
Reed, you ask the right question(s). I am short on specifics (not being an expert in the financial industry), but I'll take a whack at some sweeping generalizations.
The ends we seek in regulating the financial sector should include the following:
1) Prevent the formation of bubbles, so as to mitigate the effects of their inevitable collapses.
2) Ensure transparancy and accountability in all transactions, products (e.g. bundles of loans), and services.
3) Establish and maintain a fair, level playing field for the small investor and the average consumer/participant in the economy.
I have a few ideas on specifics, but I won't make this a too-long post.
One thing I'd like to hear domments on, however, is this: Would it be a good idea to make a rule that originators of mortgages have to hold and service the loans for, say, 2 years? Maybe five years? (The thought is that this would eliminate the crazy loan terms without having to spell out exactly what the requirements for every loan would be.) Is it nuts to expect a bank to make a loan and then hold onto it -- you know, to collect the interest on the money they lent?
-- ARG
September 20, 2008 7:47 PM | Reply | Permalink
Pardon the extra post, but I've just changed avatars, and I wanted to see whether it shows up correctly.
Should be a dram in a Glencairn glass...
Mmmmm.
-- ARG
September 20, 2008 10:16 PM | Reply | Permalink
Yummy avatar.
September 21, 2008 12:05 AM | Reply | Permalink
To make sure what is happening now will never happen again. Bring Glass-Steagall back. Change the rules about capital on hand. Put an end to irresponsible speculation and predatory lending practices. If the players in the financial market can't act responsibly and ethically on their own (which they repeatedly have shown they can't) they should be made to. We The People now own AIG and might soon own a lot of bad home mortgages so we should be able to have a say in making the rules...
September 21, 2008 12:36 AM | Reply | Permalink
test
September 21, 2008 1:34 AM | Reply | Permalink
the most obvious rule is simply verify the person applying has the income to cover the life of the mortgage. This injection of a small amount of common sense would have eliminated 90% of this problem
September 21, 2008 8:45 AM | Reply | Permalink
With the takeovers of Fannie, Freddie and AIG we have the start of a substantial sovereign wealth fund. Is that good, bad or neutral? Like almost any other financial entity it can be any and all of those things. It may also be necessary as a counterweight to the rising global economic influence of foreign SWFs. See here for more information.
We already have one of the most transparent of the SWFs operating in the United States, the Alaska Permanent Fund. A percentage of the royalties Alaska's North Slope oil is put in this fund to be managed professionally.
We seem to have a convergence of current events providing a teachable moment on sovereign wealth funds. We should use the opportunity.
September 21, 2008 1:46 PM | Reply | Permalink
dear destor23, i do not know how old you are, under 18, ???, but i am 81, worked all my life, & i do not know any body that cares what interest rate i get on a saving account... they also do not care whether you want to retire comfortably, or just sit in a casino in macab... it is all up to you, not society... i gambled & lost over 10 million on real estate development in the palm springs area... my father used to tell me, "bet them heavy, & you will sleep in the street... i am almost sleeping & no one seems to care... can you spare a nickle buddy...
September 25, 2008 3:00 PM | Reply | Permalink