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Commentary :: International
Greed's Check
05 Apr 2009
Questions abound in our current financial climate. How do we protect ourselves? How safe are jobs? Will the economy stabilize? Is retirement an option anymore?
What is not questioned is that much of the global crisis originated through our financial system. Specifically via the U.S housing bubble. In many ways it was the product of what seemed like good intentions to get more people into home ownership.
These have included the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 under President George H.W. Bush. It required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing. During the Clinton years a number of attempts to ease requirements were made. Notably in 2000 when in November Fannie Mae announced the Department of Housing and Urban Development would soon require it to dedicate 50% of its business to low and middle income families and its goal was to finance over $500 billion in Community Investment Act related business by 2010.
Then in December of 2000 they enacted the Commodity Futures Modernization Act of 2000. It allowed the trade of credit-default swaps by hedge funds, investment banks or insurance companies with minimal oversight. At that time the bubble was not yet visible.
The actual bubble seems to have occurred between 2001 and 2005. From 2001 to 2003 the mortgage denial rate was 14 percent for home purchase loans, which is roughly half of what it was in 1997. Despite warnings from some notable economists and even Freddy Mac's former chief risk officer the Bush administration signed the American Dream Down Payment Act into law on December 16, 2003. This was part of what the administration termed it's Homeownership Challenge the goal of which was to increase homeownership by 5million families in seven years.
The administration was attempting to broaden goals initiated by previous administrations. The truth underlying the noble intentions was that doors had been flung open to undreamed of abuses. Excessive deregulation of mortgage lending was encouraged and enforcement of rules was slackened. The good intentions were not followed through on. The housing bubble inflated unchecked until we were in its crosshairs.
Fannie Mae and Freddie Mac were zeroed in on too late. The attitude towards the financial markets was not attributed purely to residential lending. Unrestrained trading of credit default swaps eventually knocked the feet out from under financial giants the collapse of which it was believed we could not survive.
Letting markets regulating themselves held a steady catch phrase since Reagan. Government was the obstacle not the solution. Less market regulation by government meant financial success. The spirit of that ideology remained with us and most decisions with regards to economic policy were borne from it.
The idea markets will simply regulate themselves is great in theory. When customers don't like something they go elsewhere. If corporations and institutions take excess risks and fail that's how it is. There will always be someone to take up the slack.
But large corporations are fueled by bottom lines even though they may grow large enough that if they fail we could all go with them sans fail-safes. Greed drives those in charge of making decisions regarding policy. The more opportunities they have to expand their wealth the harder it drives them. That's business. We cannot expect businessmen to suddenly become something which is not in their nature. Although in theory it would be nice how can they be both?
When residential lending regulations were loosened both sides of the lending equation took advantage of the system. Lenders turned a blind eye to applicants who were unqualified for loans and applicants squinted hard as they signed agreements they couldn't afford imagining what they hoped could be.
Those who benefitted most were at the highest levels of lending and related industries. Money was handed out without the capitol to back the risks, but it didn't matter because people at lending companies were bringing home millions in bonuses. The financial sector was booming as a result of high risk loans.
Few within the companies were sending flags and those that were went ignored. In Washington a culture of hands off left the SEC passing on violations instead of protecting voter interests. Apparently CEO's whose sole motivation was greed were expected to say "although I could become wealthy beyond my dreams I won't put my company and country at risk." Not that they shouldn't or that I condone their irresponsible behavior, but have they ever?
Greed did not check itself. It didn't pass up making two hundred million in one year to stretch those funds out over the next ten to twenty years and set a safe and secure path for the company and those who rely on it. Apparently greed has a dulling effect on the senses of the person being fueled by it and when left to it's own devices will consume all it can in the place it resides even if at the expense of the host. Greed unchecked leads all concerned to their own demise. Those who suffer most are those with the least.
So although it may not be in the best interests or nature of business people to curb their greed it is in the interests of those protecting the companies and those protecting the nation. In the end we need regulation of financial industries and serious enforcement of the rules. We now know that not to do so is hazardous to the security of the national and global financial systems. We have enforcement of rules regarding airline safety, food safety and building codes for reasons. It took a while but we're starting to see that although markets need freedom to operate they need checks to thwart any degeneration pulling everyone down with them and people willing to do those checks.
To read about my inspiration for this article go to
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