The Culprit Is All of Us

By SCOTT S. POWELL

The government's meddling got us into this mess.



CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.
The Bush administration made many mistakes, but deregulation was not one of them.
Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.
The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.
Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.
We are in this mess largely because critical thought and moral judgment have been subordinated to the politicization of our economy, resulting in regulatory gaps and excessive controls of the wrong kind.
Government regulations should be limited to those that increase and protect transparency and competition, protect public and private property, promote individual responsibility and enforce equal opportunity under the law. Even if the right laws and regulations could be found, they would prove insufficient to protect freedom and prosperity.
The Foundation of Economics
In his farewell address, George Washington said that religion and morality are essential to sustain democracy in America. He might well have added that virtue is just as indispensable to its economy. When the captains of banking and finance and their congressional overseers fail in moral judgment, the results are disastrous for everyone. As we are now witnessing in the real-estate, stock- and bond-market dislocations, once trust is lost, markets freeze and long-standing relationships break down, resulting in illiquidity, irrational pricing and severe losses.
Today's problems have their roots in programs and financial instruments that shifted the locus of moral responsibility away from private individuals and institutions to wider circles that were understood to end with a government guarantee. Heads of the top banks and financial institutions could approve substandard home-mortgage underwriting -- prone to increased default -- because those loans could be securitized by Wall Street and sold off to investors or to government-sponsored enterprises (GSEs), with no likely recourse to the financial institution of origin.
Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.
No Surprise
The risk lurking in the GSE portfolios was acknowledged in the Bush administration's first fiscal-year budget, released in April 2001. It stated that Fannie and Freddie were "a potential problem" because "financial trouble of a large GSE could cause strong repercussions in the financial markets, affecting federally insured entities and economic activity." Fed Chairman Alan Greenspan issued repeated warnings that the GSEs "placed the total financial system of the future at substantial risk." Such warnings went unheeded even after accounting scandals rocked Fannie and Freddie.
The collapse and government seizure of Fannie and Freddie in September 2008 ended the experiment in partial socialization of the U.S. housing sector. Before we try complete concentration of federal financial power, we should understand that power and political corruption abrogated moral judgment on every level.
The poor and middle class were encouraged to live beyond their means and buy houses they couldn't afford; speculators were lured into excessive risk-taking; banks were rewarded for lowering their loan standards; and Wall Street found new windfall profits from securitizing and reselling bad loans in bulk. With the support of regulators, credit-rating agencies provided cover for the whole charade.
Spreading Failure
There is plenty of blame to go around on both sides of the political aisle. But the lesson should be clear that socializing failed businesses -- whether in housing, health care or in Detroit -- is not a long-term solution. Expanding government's intrusion into the private sector doesn't come without great risk. The renewing and self-correcting nature of the private sector is largely lost in the public sector, where accountability is impaired by obfuscation of responsibility, and where special interests benefit even when the public good is ill-served.
George Washington also warned against excessive partisanship, which distracts public councils and enfeebles public administration. Rather than blaming the party in power or the party formerly in power, the nation should stop living in denial of the mistakes of both parties.
Spreading failure across the entire economy risks turning a recession into a depression. Regulatory reform now must foster responsible behavior and financial accountability. Far better for our citizenry and businesses to have a strength and resourcefulness that comes from creativity, honesty and self-reliance than to have a growing dependence on a profligate government.
SCOTT S. POWELL is a senior VP at ELP Capital, which manages a commercial real-estate debt-based hedge fund; a visiting fellow at the Hoover Institution; and a Commerce Bridge board member.

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My husband ran into an old neighbor of ours a couple days ago. She moved to the US from Poland I am guessing maybe 25-30 years ago. She said she came from a socialistic country and was afraid we were headed in that direction. She said whatever we have, even with its problems, is better than going to socialism and she sure hopes we stop before it's too late.

She is correct.. I believe too many people are letting the government step into areas where they don't need to be. Government is one of those things that if you let in an inch they will go a mile (obviously look at what is going on with everything right now.. not just the economy but with our rights.. gun laws.. free speech..etc.) I for one don't believe that the government should be in every part of my business, if I want to go by a gun I shouldn't have to have a million dollar insurance policy.. which doesn't even exsit! I think it is time to step back and remember that EVERYONE in the goverment (yes even the President) is a politican... and not a "friend".

She is correct.. I believe too many people are letting the government step into areas where they don't need to be. Government is one of those things that if you let in an inch they will go a mile (obviously look at what is going on with everything right now.. not just the economy but with our rights.. gun laws.. free speech..etc.) I for one don't believe that the government should be in every part of my business, if I want to go by a gun I shouldn't have to have a million dollar insurance policy.. which doesn't even exsit! I think it is time to step back and remember that EVERYONE in the goverment (yes even the President) is a politican... and not a "friend".

I think people should try their hardest not to have a forclosure.. but it is too easy now to get out of it that people have the "I don't care attitude". I am only speaking of the people around where I live, as I have not seen other areas that have been affected. !!!

No, I don't think everyone does...like I said I only know what goes on around me... I can't make assumptions for everyone else in the country like some other people do. I know how they feel because they flat out told me... I did not make the comment without knowing.. that would be wrong.

To me I believe that there has been wayyyy too much regulation going on lately. In my opinion I do not believe the government should bail anyone out of their forclosure.. I have seen way too many people here feel like just "giving up" on their house and moving somewhere else, not paying on their house, and going into forclosure. While this happens they sit in their pretty new houses (on post) and think about how wonderful it is that they're going to be bailed out... too me that is the exact oppsite of what should happen. I think people should try their hardest not to have a forclosure.. but it is too easy now to get out of it that people have the "I don't care attitude". I am only speaking of the people around where I live, as I have not seen other areas that have been affected. It just really irks me that I am paying my taxes to help these people out.

I know of three families around here that are going through that. I think certain people SHOULD have the help, like the ones who DIDN'T buy more than they could AFFORD, who lost their jobs and now are looking at having no where to live. I don't believe that people who knew they couldn't afford what they have, or just let it go to waste because they don't "feel like paying on the house this month" should recieve any help what so ever. To me it's like patting them on the back and telling them "it's alright, at least you tried.. here is some money to help you through your troubles even though you put yourself in this position". Sorry, but I would rather my hard earned tax money go somewhere else....