The Associated Press ran a story yesterday analyzing the financial "reform" bill which recently passed in the Senate with the absurd headline, "New financial rules might not prevent next crisis." Stop the presses! Messrs. Wagner and Jacobs might really be on to something here! As reported on these pages earlier, the final version of the bill does not include the tough measures proposed by Senators McCain, Shelby, and Gregg to force Fannie Mae and Freddie Mac out of government conservatorship.
Instead, the government will continue to own and run the two institutions at the very heart of the financial collapse. Bad mortgages will continue to be issued or underwritten by Fannie and Freddie, backed by the unlimited credit of the federal government. Big Wall Street banks will still find loopholes in the laws and regulations in order to make a profit, emboldened by new rules which only further strengthen the policy of "too big to fail." Loose monetary policy and speculation will continue to drive up prices and lead to another asset bubble.
Democrats have used this crisis as nothing more than a cynical ploy to claim that they're "getting tough on Wall Street" and to shift public rage away from the health care fiasco leading up to the elections. However, the longer-term implications of this self-serving blame game are troubling for the nation. By claiming that they have fixed the problem, Democrats reinforce the dubious notion that the government can predict and control the future even though the events which led up to the crisis argue precisely the opposite.
In a profile of Sheila Bair, the head of the FDIC, Time magazine notes that she saw warning signs that mortgage markets were headed for trouble almost immediately after her appointment:
Bair had hardly been named to the FDIC post by George W. Bush in 2006 when aides alerted her to a dangerous disintegration of lending standards across the banking industry — loans with hidden fees, poor documentation and explosive adjustable rates. Even though the regulation of these standards was the primary responsibility of the Federal Reserve, Bair authorized her staff to purchase a large industry database to confirm their suspicions. "It was just amazing to us what we saw," she says.Despite these and many other warnings in 2006 and 2007, the Democrat-controlled Congress failed to act. It takes a stunning credulity to think that next time will somehow be any different. The problem was not a lack of regulations or oversight, but a lack of will on the part of politicians to respond. Instead of pointing fingers at the private sector, Democrats could have implemented real reform, but that would have required them to admit that government is the problem, not the solution.