Felicia Muftic: Economy a train wreck caused by federal regulators asleep at the switches
September 21, 2008
We are going through the worst economic crisis since the Great Depression.
The list of foreclosures in Grand County runs on for pages and pages. Retirees watch the value of our IRAs decline and our cash flow dwindle. Unemployment and Inflation are the only indicators that are up and that’s the wrong direction.
Investment banks once thought sound and with great names as Lehman Bros and Merrill Lynch are taken to the slaughterhouse as the slogan “bullish on America “becomes laughable. The government bails out a brokerage firm and the largest mortgage institutions in America, Freddie and Fannie, It loans our largest insurer 85 billion dollars. Aside from the high rate of foreclosures in our valley, we have not yet felt the ripple effect.
In Grand County, we may see it as less consumer spending on lift tickets, tourism grinding to a halt, real estate sales drying up, no bank willing or able to make a loan, and second home construction and restaurant spending taking a dive. We had to bail these financial giants out to prevent a worldwide economic crash, since other countries had invested in our economy as well. However, the American taxpayer has been stuck holding the bag to cover the bailouts and we should be demanding that steps should be taken to keep something like this from happening again.
The plans put forth by the presidential candidates are in stark contrast with one another. Jonn McCain’s proposal: The cause was greed and fraud, he says. To cure that, we first must study it so we can reform fraud and greed later. Don’t hold your breath that there will be any fundamental regulatory reforms. He prides himself as an anti regulator. The Republicans say the economy is basically sound and the market will take care of itself. They need a grip on reality.
Obama not only wants to go after fraud and market manipulation, he thinks that the federal government needs to become more active regulators and that rules and standards need to rewritten and actually enforced. Sure, it steps on the toes of those who believe free market systems should be unregulated. However, when the problems get so big as a result, and the government has to bail out a major failure, a mockery is made of the free market system that is truly fundamental.
Aside from McCain’s idea to study the problem, he doesn’t even understand the problem: Stop greed, he exhorts. Come on, McCain. Wall Street is always trying to make a buck. Greed is embedded in its pursuit it of profit. Self-restraint is not.
How do you reform greed by studying it and continuing the same economic policies that reward and permit greed? You don’t. Is fraud the problem? A part, but the problem is so much greater than dishonest sales techniques and bankers hiding the true values and risks of their portfolios. It is basically the mortgage industry throwing caution to the wind in making bad loans with no one to stop them. It was a train wreck caused by federal regulators asleep at the switches and the middlemen in the industry unloading questionable loans onto the next track. The bottom of the food chain, consumers, feel personal pain as they lose their homes and the top of the pyramid, those who bought the financial instruments, see them turn to dust.
How did this happen? During the Bush administration, the mortgage market was deregulated to some extent and the underwriters dropped guidelines, which used to guarantee that loans would and could be paid back. Federal regulators also looked the other way and did not enforce whatever rules there were left. All of this was done in the name of catering to business interests who wanted the freedom from regulation.
You may even have noticed the change if you took out a mortgage recently: You didn’t have enough down payment money saved up. Unlike the old days, the banks would just finance the down payment for you at a higher interest rate. You couldn’t prove that you had enough income and ability to pay back the loan? No problem. Unlike the past, the bank would lend even to those with inadequate income and bad credit; they would just charge you higher interest. You weren’t sure the property was really worth as much as the loan amount? The financial institution would find an appraiser who says it is worth that much. (No one was looking over the appraiser’s shoulder anymore).
Need to pay off your credit cards? Why not just take out a second mortgage or refinance your house at its inflated value and take the cash out to pay off your credit cards. Think you had the ability to pay more for a an increase in payments later when you got that big raise? No problem. We have the plan for you to get you into that house: just pay a little for the next five years and the bank will increase the payment amounts later, resetting the loan. You didn’t understand that part because at closing all of that was just a stack of paper you needed to sign and you only had 30 minutes to read the gibberish stuck in front of you. The bank didn’t care if you met your obligations: the loan was sold to a middleman, who sold it to an investment bank, who sold it to investors who did not realize the riskiness of the loan.
Barack Obama’s proposals outlined in a speech in Golden grasped what needs to be done to make the mortgage market work better. According to Obama, the answer is a stronger role for the Federal Reserve, the Security and Exchange Commission or any federal institution that guarantees and underwrites those mortgages to make sure that higher standards are met, that the lenders are not taking excessive risks, and that supervision and oversight are exercised. This is the keystone of needed reforms. He believes that the financial institutions involved and subject to federal regulations likewise need higher capital requirements and fuller disclosure to investors of the soundness of the loans so that investors know better what their risks are. Streamlining the regulatory agencies is part of the solution, too, so that everyone can understand what the expectations and requirements are and that they are uniform, regardless of the type of institution. He also believes that CEOs should be rewarded for success, and not given a golden parachute and soft landing when they fail.
Obama gets it; McCain does not.
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