Banking Bandits

October 9, 2008


The thrift industry has concluded a major bailout deal with the Federal government that will have us paying for their mistakes for decades to come. How and why did this debacle come about?

Well, it's happened again: huge multinational corporations are depending on the largesse of the American taxpayers to restore them to solvency after years of mismanagement and outright thievery that has brought the thrift industry to the brink of bankruptcy. How did this come about and why do we have to foot the bill for it?

Many moons ago, in the midst of a financial crisis rather similar to the current one, the US Federal government stepped in and began regulating the banking industry in this country. Part of FDR's New Deal in the 1930's was a new deal for banking. Many many rules and regulations were put in place, based upon the experience of the prior 20 years of boom and bust, with an aim to making sure that the larger financial institutions would not operate so shortsightedly and get themselves into a mess again. The banking industry was not amused by all this regulation, but they were desperate, so they accepted the new rules and went on.

But they did not go quietly. They grumbled from the beginning, and over time they began to use their renewed wealth and power to raise these questions "Is all this regulation really necessary? Why should the government regulate banking to this extent? Would it not be better and more efficient to allow the market to regulate things?"

These questions went mostly unheeded until the Reagan administration. Reagan was allegedly all about the market and all against regulation. So, they passed some legislation that relaxed some of the rules. They did quite a bit more by changing the administrative regulations -- these are guidelines and requirements that are how the Federal government operates, not laws, but they have a big impact on how laws are enforced. The banking community was very grateful. The changes gradually continued throughout the Reagan and Bush I administrations.

The bankers were a little afraid of the Clintons, at first, but then it turned out that the Clinton's were big fans of financial deregulation, too. After all, they made most of their money lawyering for banks trying to do an end-run around this kind of regulation. Several key measures were passed during the Clinton administration that more or less began the national real estate bubble of speculative investment. Then Bush II came in, and it was open season on all kinds of legislative and administrative regulation. The bankers got an almost free hand to operate within their beloved market. This added additional hot air to the real estate bubble. Thousands and thousands of millionaires were made by this process.

Trouble is, there are two kinds of wealth creation:

  1. factors that actually increase the real value of what is.
  2. factors that allow smart charlatans to steal other peoples' money by making them believe the real value has increased,when, in fact, it hasn't.
Type 2 financiers flock to any kind of a bubble, because it is just the kind of get rich quick device that allows them to earn millions of dollars, get out, and retire rich. This is precisely the injudicious speculative behavior that the New Deal era regulation was intended to prevent.

And it did prevent it in the 1950's when America experienced a housing boom as a result of the baby boomers. 'The regulatory stranglehold on finance' (Wall Street Journal) artificially reduced the money supply, which reduced the amount of profit that speculators could make, which enabled thousands and thousands of ordinary folks to buy houses (and keep them) because a huge real estate bubble did not happen.

Precisely the same kinds of forces were at work on the market in the past twenty years. But, in an era of decreasing regulation and increasing reliance on market forces, some pepople made out like bandits and then did the bandit thing of disappearing with their loot as soon as the bubble began to burst. Deregulation left foxes in charge of the hen house and now we've got to pay for their greed.

If we don't want the whole financial empire to come crashing down around our ears, we have to make good the blank check those banker bunco artists wrote, but what then? How are we going to prevent it from happening again? How about we put some of that good old regulation back in place? How about we act preemptively to deprive future financial pirates of the opportunity to plunder the public purse? How about we recognize that all profits are not in the public interest and that the market is incapable of regulating itself wisely?

Some regulation may be bad, but some is obviously not all that bad.

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