With the Dow getting whipsawed today (currently back under its key 10,000 point level, as of the time of this post), Kevin Hassett writes at the American Enterprise Institute, “The U.S. government, fresh off nationalizing its largest automaker, then legislating the takeover of health care, is now enveloping financial services in its stifling embrace. The bill gives the Federal Reserve dictatorial power over firms that are viewed to be ‘systemically important.’ The distance between such a rule and outright government control would fit on the head of the pin:”
The third force driving markets south has been the realization that the medicine will do nothing to make financial services any safer. The bill is the economic equivalent of a placebo treatment for a patient with terminal cancer.
Starting with the 2008 election, Democrats have peddled a conveniently narrow explanation of the financial crisis. It holds that greedy bankers tricked borrowers into taking loans with low teaser rates they didn’t understand. These innocent victims were unable to make the monthly payments when their interest rates adjusted upward. This led to the collapse of the housing market.
The truth is much more complicated.
Fortunate Borrowers
Lenders were able to print money because they could pawn off any loans they made to Fannie Mae and Freddie Mac at a healthy profit. There was no need to inspect the ability of the borrower to repay the loan, because repayment was Fannie and Freddie’s problem, not the lender’s. Many borrowers, far from being confused, couldn’t believe their good fortune. They were given essentially a free option on a new home. If the price went up, they stood to make a healthy profit. If the price went down, they could walk.
The financial-reform bill reveals that the Democrats believe their own screwball rhetoric. How else to explain the proposed new Consumer Financial Protection Agency, which would make sure that borrowers aren’t tricked again. It would presumably accomplish this by establishing lending rules and using its authority to delve into bank operations.
The result is legislation that increases the likelihood of another housing bubble–only ext time, we won’t be able to say that borrowers were tricked into accepting something too good to be true. The bill leaves Fannie and Freddie standing, without addressing the fact that they are still subsidizing loans to those who can’t repay the principal. The inevitable outcome will be a replay of the entire real estate fiasco.
Congressional leaders have no idea what caused the financial crisis, but that has not stopped them from crafting a massive new set of intrusive rules. The only sure thing is that the cost of doing business in the U.S. just increased enormously, as did the odds of a double-dip recession.
America has become the land of high taxes, big government, complex regulations and indignant politicians. The future of such a place is not bright. The markets understand that.
And it’s all happening so “unexpectedly…”
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