It’s funny, and I am all for funny. But it also is somewhat unfortunate, to the extent that it summarizes unfortunate sentiments one perceives toward financial reform efforts when the Great Recession’s end seems forever delayed.
At the time of this writing, Sen. Christopher Dodd’s comprehensive financial reform bill has not yet passed. The Connecticut Democrat justified this 1,400-page legislation on Sunday by declaring, “(H)ere we are 17 months after someone broke into our house, in effect, and robbed us, and we haven’t even changed the locks on the door.”
How odd, this Dodd. Is the theft to which he refers unrelated with the billions of private losses he voted to socialize during those 17 months? Probably not.
Nonetheless, one gets the feeling that, like health-care “reform,” we are going to get financial-regulation reform whether we want it or not. Here’s proof: Even Sen. Richard Shelby, R-Tuscaloosa, wants it.
But there is a big problem with the assumption that this prolonged slump resulted from “unrestrained market forces.” The problem is that it isn’t true.
Economists generally know what caused the current recession. Although its roots can be complicated, they touch three areas.
The first is poor monetary policy for years before the crisis, including a tendency by Alan Greenspan’s Fed to counter any evidence of market corrections with increases in the money supply. This tendency proved to be particularly egregious from 2002 to 2004, when the U.S. money supply grew at the fastest rate in history.
This lead to the second area: housing policy.
At least since the Great Depression, government policies promoted home ownership over renting. The Roosevelt administration created Fannie Mae to expand the pool of mortgage holders at a time when interest rates were rising (and the public’s patience with the New Deal was falling).
Later, housing polices expanded to benefit specific voting blocs. The Community Reinvestment Act of 1977 lowered lending requirements. This act was further watered down in the 1990s.
In the 2000s, President Bush promoted an ownership society, partly because increased home ownership fed into a perceived historic political realignment that Republicans thought would favor them. Greenspan, for his part, encouraged the growth of second mortgages on Keynesian grounds. “I think it’s fairly evident,” he said in 2002, “the unprecedented levels of equity extractions from homes have exerted a strong impetus on household spending.”
We all know what happened to the housing market. Its unsustainable boom lead some to day-trade houses. In Florida, people bought houses in the morning that they would sell in the afternoon.
The third area is related to housing but deserves its own category. This has to do with the implicit guarantees the government extended to securities created by Fannie Mae and Freddie Mac. Absent these, the mortgage-backed security and credit-default swap markets would never have grown out of control.
What’s more, the implicit guarantees allowed lenders to lower capital requirements in proportion to their holding of securities backed by Fannie and Freddie. They did this with regulatory approval.
None of these developments occurred because of unrestrained market forces. They happened because of policies designed to thwart the market’s tendency to punish excessive risk-taking, translating into short-term economic growth that the political class especially valued when expanding welfare and warfare spending in the years following 9/11.
Today, such factors are being placed in the memory hole by the very people who created this situation. It’s politically expedient to blame greed, as if basic human nature somehow changed from 1995 to 2005. Such strategies deflect responsibility while justifying the continued socialization of capital markets.
These are ironic times.
Christopher Westley teaches economics at Jacksonville State University.
