In possibly the most absurd move yet, the Fed is playing political populism as they sue investment banks for their fiduciary chicanery in “duping” the mortgage giants Fannie Mae and Freddie Mac into buying their toxic assets.
While I certainly have no sympathy for investment bankers and their unbridled avarice in using out-of-control-binging of credit default swaps to line their pockets, one should not lose sight of some very basic historical facts:
1. It was the United States Federal government, under the auspices of the Community Reinvestment Act, which goaded banks into unrealistically relaxing their lending standards, using Fannie and Freddie to underwrite this dubious activity.
2. It was the Federal Reserve, first under Alan Greenspan, then under Hank Paulsen that kept interest rates artificially low and a loose and ready supply of cash for the taking, creating the liquidity that led to the misuse of these very funds.
3. It was congressman Barney Frank (D-CA) and members of the Congressional Black Caucus, the same group that pushed banks to relax their standards to begin with, that blocked multiple efforts by the Bush Administration to audit the books of Fannie and Freddie.
4. It was Fannie Mae’s CEO Franklin Raines, President Clinton’s director of the Office of Management and Budget, who collected $90 million in compensation from 1998 through 2004, and is now in legal trouble himself.
5. It was the government, first under Bush and then Obama that used fear tactics to sell its bailout of the banking industry, putting the American taxpayers on the hook.
One cannot help but choke on this entree of hypocrisy served up with a side order of demagoguery.
Moreover, from a rational and empirical perspective, one has to ask, “How precisely is this going to help the already beleaguered real estate market, much less the general economy? Answer—it won’t. As Mike Mayo, an analyst with Crédit Agricole points out: “Banks should pay for what they did wrong, but at the same time they shouldn’t be treated as a big piñata that has the effect of delaying the housing recovery. If banks have to pay for loans they made five years ago, are they going to make new ones?” 1
If this is starting to sound more than a little like the 1994 Mexican pesos crisis, the 1997 Asian bond crises, the 1998 Russian ruble crisis and debt default, the 1998 collapse of the hedge fund Long-Term Capital Management, and the dot.com bust of 2000, that’s because underlying dynamics are the same. Wild speculation, plus unfiltered access to capital via rate cuts by the Federal Reserve led to the inevitable bubble, and all bubbles must eventually burst. As Matt Welch of Reason Magazine states: “The Federal Reserve responded to the 2000 contraction by using the main mechanism at its disposal: repeatedly slashing interest rates (a move, many say, that helped inflate the next bubble).”2
If you step back and look the bigger picture, it is painfully evident our government not only sets up these bubbles, but then bails out the very entities that played fast and loose with suspect financial instruments, thereby creating a self-perpetuating moral hazard. It is akin to a drug dealer who whose clients become addicted to his product, and then is angered as they engage in inappropriate and risky behaviors as a result. In his rage he lays down new rules, while simultaneously providing them more amore access to product they crave.
All of this leads the average American to scratch his head and wonder if D.C. and Wall Street have collectively lost both their minds and their souls, along with any modicum of common sense. Or perhaps politicians have become addicted to their own drugs and need to be cut off, placed in rehab, and monitored closely for further signs of abuse. Dr. Drew where are you?
1.http://www.nytimes.com/2011/09/0 3/business/bank-suits-over-mortgages-are-filed.html
2. http://reason.com/people/matt-welch/all
