As Usual, Government Regulation as Political Payoff

I heard the president’s speech at Cooper Union College today and thought it was quite bizarre that he would criticize Wall Street for bad behavior when Washington is currently running our national debt through the roof and the policies that emanated from there in the last ten years caused our current financial crisis.  The old adage about those that live in glass houses and stone throwing immediately came to mind.  But, the president really believes that the financial crisis we still find ourselves in despite trillions of dollars in Keynesian spending is somebody else’s fault.  In fact, he indicated that, “…the system as it stands is what led to a series of massive, costly, taxpayer bailouts.”  And I thought it was Mr. Obama and his big government colleagues in the Congress who voted unconstitutionally to give away our money to the greedy, misbehaving banks.

Now, the president’s bizarre remarks are one thing, but the financial regulation bill before the Senate is even more bizarre.  Crafted by Connecticut Senator Chris Dodd, the bill will do nothing to fix the real causes of the financial crisis. In actuality, the bill amounts to nothing more than a political payoff for Dodd’s benefactors on Wall Street.  And this should come as no surprise since Dodd’s donor list reads like a who’s who of the financial services sector.        

First of all, Dodd’s bill does nothing to address the primary culprit of the financial crisis – the Federal Reserve.  Yes, consumers took out mortgages they could not afford and loan officers falsified applications knowing that they would collect their commissions long before the bad loans defaulted on a bigger institution up the line.  But the Fed supplied the poison for it all to happen – easy money.  After 911, Alan Greenspan’s Fed kept interest rates artificially low at 1 percent for three years.  This encouraged a mortgage craze as trillions of dollars were borrowed.  It was a government sponsored get rich quick scheme as many housing investors bought homes with low teaser rates and no money down.  You know the rest of the story – homeowners leveraged their homes to the max, rates adjusted up and the bubble burst when many folks could no longer afford their payments.  To add insult to injury, the Fed came to the rescue of financial institutions, even foreign ones, at the expense of taxpayers.  Make no mistake about it, the Federal Reserve exists for the profit making of banks alone.  It was established by bankers; it is run by bankers; it allows banks to inflate dollars through fractional reserve banking; and it is there for them when they need a few dollars to keep the charade going.  No other industry has a full government agency to support its shady dealings like the banking industry.  Dodd’s bill, by ignoring the Fed’s culpability in the crisis, has no chance of preventing financial calamities in the future.  Additionally, it only benefits the big banks since their benefactor, the Fed, will continue to operate unencumbered by any new regulations or oversight.

If ignoring the Fed’s role in the financial crisis is not bad enough, Dodd’s bill also institutionalizes “too big to fail” bailouts.  It should be pointed out that a major rationale of financial reform is to ensure that taxpayers never again get stuck with bailing out firms that are too crucial to our economy to fail.  Well, Section 113 of the bill provides for a “Financial Stability Oversight Council” which would identify distressed firms whose failure would “pose a threat to the financial security of the United States…”  Section 210(n)(1) establishes an “Orderly Resolution Fund” within the U.S. Treasury that would provide $50 billion in bailout money funded by taxes on financial firms.  Of course, ultimately those taxes would come from consumers in the form of higher bank fees.  These two sections of the bill essentially provide implicit guarantees from the government against failure for big banks.  They extend the life of the moral hazards that we have become too familiar with.  In the end, they will encourage big banks to continue to take undue risks which will once again put taxpayers in harm’s way.  These sections of Dodd’s bill will not prevent future financial crises.  On the contrary, they only benefit big banks by allowing them to risk everything with the knowledge that taxpayers will be there to pony up bailout funds for them.

Since 1989, Chris Dodd has received over $12 million in campaign contributions from the financial services industry.  They own him and this bill proves it.  On the other hand, the president is yet to embrace Dodd’s bill.  In his speech at Cooper Union he said to financial firms, “I want to urge you to join us, instead of fighting us in this effort.”  If he chooses Dodd’s bill to reform the financial industry he probably won’t get much of a fight from Wall Street.

Let California Fail

It is ironic that the federal government is substantially meddling in the financial affairs of other entities given the dilapidated state of Washington’s own finances.  First, there were the banks, investment houses and insurance companies – the most notorious being AIG.  Then the auto companies weighed in getting their piece of bailout funds from Uncle Sam.  Now, it seems the states will be next to tap the national treasury for funds that do not exist. 

There is a saying, “As California goes, so goes the rest of the nation.”  How true these words have become since both are completely bankrupt.  With the defeat this week by voters in the Golden State of ballot initiatives that would have drastically raised taxes to close a $24 billion budget gap, the state is on course for a complete financial collapse by July.  Unlike the national government, California can’t print money to buy more time either – no pun intended.  It must find a way to raise the funds otherwise millions of Californians will not receive checks.

But, not to worry, Governor Schwarzenegger, Senator Boxer and other Golden Staters are putting the squeeze on Treasury Secretary Tim Geithner to guarantee emergency loans that California needs to meet its obligations.  With the state’s credit rating in the toilet, some analysts believe federal backing is California’s only hope to secure the loans it needs to pay its bills.   The proposal would collateralize U.S. taxpayer funds to guarantee private lenders that they would be repaid if California defaulted.  The concept is to take the risk out of lending to California for banks and place it squarely, again, on the shoulders of American taxpayers.

Of course the leverage state officials are using on Geithner is that California is “too big to fail.”  They claim if the state were to go belly up it would send ripples through the rest of the country and even the world.  Further, if Washington allowed the collapse to take place imagine what that would do to the confidence the rest of the world has in us to lead economically.

Clearly the feds are in a totally unenviable position.  If they don’t bail Sacramento out they will look really bad given their enormous generosity towards unscrupulous bankers, and inept carmakers.  Since most of the money California needs to borrow will go to ordinary folks, teachers, cops, government workers, Washington can’t be seen again to favor the interests of Wall Street over Main Street.  Thus, I believe there is no question that the Obama Administration will bailout California.  Naturally, this is a big mistake.

In the first place, if Washington succumbs to the “too big to fail” ploy with California, then what happens if say Wyoming asks for bailout funds.  Can it be denied because its economy is not nearly as important as California’s to America’s health?  Is it proper to favor one group of Americans over another simply by virtue of where they live?  I realize we do that now with things like highway funds, but saving one state and letting another go is a horse of a different color.  What about Wyoming’s portion of the federal bailout funds for California?  If Washington submits to Schwarzenegger’s request it will open up an array of ethical and legal questions pitting states against each other.

Then there is the “moral hazard” that would result with a California bailout.  Given that politicians are not very courageous when it comes to making touch choices, state bailouts by the feds would allow state officials to manage state funds even more irresponsibly.  California is a perfect example.  The statist politicians there have overpaid public employees, spent generously on social services, and overregulated business and the environment.  Bankruptcy is the perfect solution to their reckless spending.  It is what ended socialism in Eastern Europe; it should be used to end socialism in California.  Without it, politicians of all stripes will believe that Uncle Sam will catch them when they fall.  This will impede economic recovery and perpetrate the myth that Washington has a bottomless bank account or a bank account at all.

Which brings us to the question of where does California think the feds are going to get this money anyway?  Our leaders have become oblivious to our financial condition.  When you can’t pay your bills you are bankrupt.  Washington has been bankrupt for a long time, but again has had the means (printing press) to put it off.  And put it off the politicians have.  That is why we now face the economic situation before us – a lower standard of living, mountains of debt both personal and national, and a gigantic task of rebuilding our industrial base so that we can compete again.  You see the politicians since at least 1971 have mortgaged our future; those bills have come due; and we don’t have the money to pay them.

So, California is not alone.  “As California goes, so goes the rest of the nation.”  Both entities are broke.  Perhaps instead of groveling to Washington to bail them out with funds Washington doesn’t have, the politicians in Sacramento can set an example for Washington to follow – deregulate, end the welfare state, disband public unions, and live within your means as a society.  Wouldn’t it be nice if California led the nation in a positive way for a change?