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.

Stay tuned.


Julie Schuler said...

People should stop selling stuff I don't understand, like financial advice and securities. They should stick to selling things like buttons and apples.

moneythoughts said...

Julie, I can understand where you are coming from; however, even for the professional money manager, the laws have failed to deal with a whole bookshelf of abuses. For the good of so many people that have their retirement (pensions) investment in our markets, we need rules to protect us all.

ducksmahal.com said...

I’m not altogether ready to say the devil made them dereg just yet. I actually think we’re dumber than we are evil and that’s why we need very specific rules – that “help” us not hurt anyone and our self, but this is an Indy 500 economy racing with the world and to go faster we sometimes hit the wall. It’s a difficult balance, I agree. Now if you want to go Deuteronomy 23:19 on this and do not charge your brother interest, I suppose I could hang with that too. How do I become your brother? A loan without interest is a very difficult mortgage to go upside-down on. But, that isn’t practical either. Then behind the evil and the dumb lay the perfect storms.

I agree with you, when Congress seems to think they can do everything, and know everything there is to know - about everything, look out. But you got to agree, AIG was way more out of control than it should have been allowed to be and that’s got everyone antsy. Some feel Bernanke could have let AIG “feel the pain” a little more. Warren Buffett criticized Bernanke in 2008 for wanting to buy trash assets at a premium rather than at market rate just to get banks to sell. As one analyst put it to the banks in 2008, “Sell your stuff now [at market rate] or forever rot in bankruptcy court.” As I read it, I understand that to be at the root of the Bernanke confirmation, I have no doubt he will be confirmed anyway. The Volker rule is a reminder of why Glass-Steagall in the first place, but are these rules workable in a modern global system? Some say no.

It will be interesting to see how this plays out. But, what do I know? I’m one of the dumb.