The republican party platform can be reached through this link. The plank we examine here is “Restoring the American Dream“. In that plank, there is a bullet point “Freeing Financial Markets”, where the goals of this plank seem to miss the lessons learned from the 2008 financial crisis. Before examining those items, I would like to summarize my understanding of the basis for that crisis. (At the end of this post, are some sources for that opinion.)
The crisis happened due to several contributing factors, as follows:
The Bush administration encouraged the relaxation of regulations regarding qualifications for home ownership on the belief that many Americans would be able to afford a home if only they didn’t have to meet stringent requirements for qualifying for loans. The premise was that the down payment restrictions were difficult to meet due to issues in the economy. Once past that hurdle, Americans would be able to afford the monthly payments. The instrument to accomplish this was Fannie Mae and Freddie Mac underwriting mortgages that banks would not typically approve.
The Clinton administration, in response to bank and Wall Street lobbyists, led in the elimination of the Glass-Steagall Act of 1933 that is widely credited to have protected the US Economy from influences that created the Great Depression.
The result of the Bush administration efforts was to fuel a boom in the housing market, and increased the number of property owners, as well as fueled property speculation, and multiple unit ownership. The result of the Clinton administration efforts was to allow mergers of investment banks with commercial banks. This created even larger entities that were later deemed to be “too big to fail”. Wall Street then created a new way of splitting out the risk of these loans and combining them into financial instruments that were based on bad loans, but offered higher interest rates to be attractive to consumers. The ratings agencies sold AAA ratings without regard to the worth of the underlying securities. More and more money was put into these instruments, and all financial firms were making tremendous amounts of money in fees. Late to the table, AIG offered insurance on all this risk. Over building in the housing market led to a glut. Most of the loans were at sub-prime rates in a balloon structure. When the new rates hit, due to the glut and slow economy, people had to default, and the securities were worthless. This called for a run on the banks, and then even AIG was almost bankrupt. AIG also takes the risks on industrial loans, so when it has trouble, even firms that have nothing to do with Wall Street are in trouble. GE needs loans guaranteed by AIG. Even industry was threatened. So that is where the entire US economy was within a few days of completely melting down. The Great Depression is what was being faced. Tremendous infusions of capital were released to facilitate lending and to keep credit flowing and the economy solvent.
Many world famous economists figured that the “forces of the market” would cause weaker banks to fold, and leave stronger banks in their place, the system being the better for the passing of those weaker institutions. They were surprised by these turn of events. A world leader in financial theory, Milton Friedman admitted that he had been wrong, and inappropriately influenced by authors like Ayn Rand. Theory is great, but the real world sometimes more complicated than can be described by theory. The failure of this system had largely to do with fierce competition in the financial system, and the greed of all of its players. They knew things couldn’t last, but that only resulted in more voracious practices, and a loot and burn strategy. The entire system is populated by these types, and so there were not enough “stronger” players.
In the wake of the crisis, the public called for regulation to prevent a recurrence of these events, and for the people responsible to be put in jail. Regulations leading to the crisis were not sufficient to put people in jail. This is another reason for the public to call for new regulations. The response to this was the Dodd-Frank act, which calls for more regulations on these financial players, and higher collateral to be held to offset risks of loans or investments. Many financial experts say that while Dodd-Frank was good, the system still needs reform.
Naturally, Wall Street and investment banks are screaming that Dodd-Frank is hobbling their efforts, and puts them at a disadvantage to foreign institutions. It should be noted that these were the exact arguments that were used to dissolve Glass-Steagall. The loudness of this screaming should indicate how much money is at stake. This money is designed to go in their pockets, not in those of main street Americans.
Now again, the republican party platform states “Unfortunately, in response to the financial institutions crisis of 2008-2009, the Democratic-controlled Congress enacted the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank.” They want to dissolve Dodd-Frank, and the ” Consumer Financial Protection Bureau “, who they describe as ” has dictatorial powers unique in the American Republic “. Their answer is “If the Bureau is not abolished, it should be subjected to congressional appropriation.”. They also state “no financial institution is too big to fail”.
So here we have it. The republican answer is to give the financial players everything they want, despite the fact that they have already proven that they are willing to pursue their own greed at the expense of the American well being. They believe that the crisis should have been allowed to happen, in contravention to what even experts like Milton Friedman have said. This is but one example of how a big business agenda is pursued contrary to the interests of the American people. It works because few people are really aware of the details. Few people keep in mind the depths of greed that are continually showed by all members of the financial system.
Repealing Dodd-Frank would be turning the foxes loose in the hen house again. In fact, not just any foxes, but those foxes who have already tasted chicken, and liked it.
Too Big To Fail – Andrew Ross Sorkin
All the Devils are Here – Bethany McLean & Joe Nocera
Shaky Ground – Bethany McLean
Editor – PoliticalNationUSA.com