Tuesday, January 26, 2010
The Problem Rests With A Congress that Refuses To Learn Anything From Their Mistakes
Yesterday I wrote a little about the political-economic philosophy of deregulation. This philosophy like most philosophies is grounded in some belief. I do not want to challenge that belief system because a person's personal beliefs concerning a supreme being are just that, personal. But, how can I start in the middle? I guess, rather than get tied up in a debate about religious philosophies and laws of nature, I will try and stick with economics in the hope that each person can think through what I write.
Doing away with banking and investment securities regulations brought us to where we are today. The existence of these laws is not the reason for the financial crisis, the mortgage-backed bond market meltdown or the recession that followed. Had these laws been kept in force and not weakened or eliminated, the size of the crisis would have been averted.
Economic panics have occurred throughout the history of the United States. But in 1913, Congress created the Federal Reserve Bank to be the banker's bank so financial panics could be avoided. In the 1930s, Congress created the Securities & Exchange Commission and later the Investment Act of 1940. These laws were designed to protect the consumer of investment products. And, for the most part, this is what they did for many years.
The laws that came out of President Roosevelt's administration were designed to deal with the world of finance that was rapidly changing with the technology of the day. But, by the late 20th century, technology had advanced so much faster than the laws to protect the investor that the "old laws" were erroneously believed to be no longer needed. As a result of this belief, the world of finance and investment was believed to be best served by the laws of free and open markets. This philosophy assumed that the markets would correct any and all abuses and that the Federal Government was not needed in this arena of enterprise.
After the building burned to the ground, Fire Chief Alan Greenspan admitted that he made a miscalculation. It was a lot more than the former Federal Reserve Chairman that made a huge miscalculation, several presidents and a Congress, not schooled in economics as much as in religion, partnered in this disaster.
Now, the Congress is thrashing around looking for a new scape goat and think they have found one in Ben Bernanke. Chairman Bernanke is not the problem. The problem rests with a Congress that refuses to learn anything from their mistakes and believes that the problem was too much government regulation. Such stupidity is a challenge to even the best economic theorists. I support the ideas of Paul Volcker and Elizabeth Warren. I wish them both much success in enlightening the administration and the Congress of the United States.