Wall Street and major corporations not only control our economy. Through their huge campaign contributions, they also disproportionately influence our political system, its legislation, and the lives of all of us.
There is hope…
Clean Elections would ensure that politicians were accountable to the voters rather than to big corporate funders. The greed of Wall Street and corporations would be held in check when politicians no longer rely on them for funding their election campaigns. Economic and housing policy would be made in the best interests of the American people as a whole rather than in the interests of wealthy corporate-based elites.
Our current housing and financial crisis is rooted in the politics of deregulation. Over the last twenty-five years, Wall Street has been able to achieve its primary political goal: the erosion of the regulatory mechanisms put in place by the New Deal. These were government controls placed on the behavior of banks and other financial institutions to prevent conflicts of interest and deceptive practices. In part the dismantling of limitations on Wall Street greed has been achieved because those rules have become dated. In part, this has occurred because the presumed regulators themselves oppose regulations. But most importantly this erosion of control has been a result of the political clout bought by Wall Street.
Since 1990 the Finance/Insurance/Real Estate has made political contributions in excess of $2 billion, far more than any other sector (the next leading sector – Miscellaneous Business comes in at $1.2 billion). In exchange, Congress has responded. Symbolic was the repeal, in 1999, of the Glass-Steagall law, the corner-stone of the New Deal financial regulation.
The financial community’s triumph has greatly exposed the country to economic calamity. There has been an epidemic of crises and scandals since the 1980's after a long period of stability dating back to the 1930's. The most recent of these events has not only caused untold hardship to mortgage holders, but has brought the economy as a whole to its knees.
The Sub-Prime Mortgage Crisis
The crisis in the housing market occurred because banks figured out how to escape the risk that they might not be repaid when they issued mortgages. Instead of keeping the mortgages on their books, they sold them in complex “products” to investment banks. In the jargon of the industry, mortgages became “securitized.”
The key point here is that because issuing loans was no longer risky to the banks, they marketed mortgages to people who would not otherwise be considered credit worthy.
This especially occurred in the form of “teaser rates.” Interest on the mortgages in the first year was kept at very low levels. When in the second or third year the interest rate was reset there of course was the possibility that the borrower would be unable to make the monthly payments. But in an environment of rising prices for housing that did not seem to be a problem to the banks. They encouraged home owners to take on a second or even third loan against the rising value of the house.
All of this came to a crashing halt when housing prices stopped rising. Borrowers who could not afford their monthly payments no longer could obtain additional loans. Defaults became epidemic.
The problem is that it was unclear who bore the risk of those defaults. The originating bank was far removed. They had sold the mortgages which had become part of complex packages held by investment banks and other financial houses. But those packages were little understood by those financial institutions who in their greed disregarded prudent banking principles – just the kind of behavior the New Deal rules were designed to prevent.
When defaults on the mortgages held by these Wall Street giants sky-rocketed, they themselves confronted bankruptcy. But because their demise would cause horrific economic damage – declining investment and rising unemployment – the government had to move to bail them out.
The result is a dysfunctional financial system. Faced with the reality that they will not be repaid the i.o.u.’s that they hold, financial institutions don’t have the money to extend new loans. Thus credit-worthy businesses, eager to expand by buying new buildings or equipment, routinely find their loan applications turned down. In this way the financial crisis is imposing severe damage on the real economy.
Now the fact is that innovations in financial markets such as the securitization of mortgages can be socially useful. Dispersing risk over a group of investors rather than just the originating bank can result in reduced interest rates and increase the number of people who can own homes. But precisely because doing so does encourage banks to reduce their standards of credit-worthiness, this advance carries with it attendant increased risks. The balance that has to be struck between the benefits and the risks is very delicate. Failure in one direction excessively confines home ownership. Failure in the other direction threatens the entire economy.
Striking that balance is precisely the role for government regulation. It was not hard to see that the number of mortgages issued to people who were not really credit-worthy was rising dramatically. It was similarly easy to recognize that the prices of houses could not continue to increase forever. Thus we are living through a calamity could have been– and was – predicted. And because the crisis was predictable, a properly functioning regulatory system could have avoided – or at least greatly mitigated - the crash and damage that is now being inflicted especially on the country’s middle and working classes.
The government should have imposed limits on adjustable rate mortgages; deceptive lending practices should have been prevented; investment banks should have been required to hold greater amounts of funds in reserve than they did; banks should have been required to maintain reasonable standards of credit worthiness. But it is obvious why Wall Street would oppose these and other possible regulation. Their earnings would be reduced.
In large part none of these were done because the financial community used its political muscle to oppose them. This muscle was rooted in the fact that no other sector contributes as much money to political campaigns as Wall Street. What the country needed were politicians who recognized that there was a need for new methods of regulation to match the innovations that were occurring in financial markets. But instead the financial sector used its wealth to reward politicians who turned a blind eye to market excesses and to punish those who wanted to curb financial greed.
A lesson that goes back to Adam Smith is that business people are the last ones who should be trusted to set market rules. The effective policing of financial markets requires the construction of a rigid wall separating the market participants from the market rule makers in the government. Such a wall is necessary because of the very great likelihood that those market participants - if entrusted to set the rules - will do so to their own advantage and game the system.
But when office-holders are dependent upon campaign contributions made by big investment houses and banks, the distinction between policing and participating is jeopardized. Wall Street firms can trust their political proxies to advance their narrow interests. It will take “clean elections” – financing electoral campaigns with public funds – to ensure that the wall that is needed will be not be breached. |
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