With the sub-prime mortgage crisis slowly settling out, and with indicators that the economy is slowly turning around, some folks in Washington are acting as if we’re emerging from the long, dark night of the Great Recession. Pretty soon, we’ll all be singing Volare again.
I have a very hard time buying that. In the late 1930s, as the Great Depression was beginning to respond to FDR’s Federal largesse, the president and Congress felt it was time to get the budget back in order. Spending was trimmed and the Federal budget was turned to the path of fiscal righteousness.
Problem was, the Great Depression wasn’t over, it was slowing down. Not quite ready for a turnaround. Which means it was a little too soon to stop with the largesse. Unemployment numbers went back up and the signs of growth in the economy stalled. The depression deepened, and it wasn’t until the war-driven boom of 1942-45 that the Great Depression was kaput.
Now folks like Senator Jim Bunning (R-Kentucky) are saying that Federal spending needs to come into line. What the heck is he thinking? Unemployment is still in excess of 9% nationally, and while there are signs of a recovery, all kinds of people and companies are still in deep trouble. After all the spending Uncle Sam has done to stimulate the economy out of this recession, is Senator Bunning ignoring the history of the ’30s and pushing us back into the depths of the recession?
The senator is not alone in thinking that there’s no need for more action.
The Senate banking committee is debating whether or not there need to be financial-regulatory reforms. Senator Christopher Dodd (D-Connecticut) is pushing President Obama’s suggested reform of a new Consumer Financial Protection Agency (CFPA), which will oversee Joe and Jane Citizen’s credit — everything from credit cards to mortgages.
Opponents of the CFPA don’t want a new, standalone agency and don’t want a new rule-writing body watching over consumer credit. They feel that there are too many agencies and too many rules flowing out of Washington as it is. And it can be difficult to argue with that point — if you sneeze in Washington you’re going to hit a regulator and/or a book of rules.
But what the opponents seem to be ignoring is the ongoing credit crisis. By fighting reforms, the opponents are saying that the status quo is fine. It’s as if they’ve watched The Treasure of Sierra Madre once or twice too often. In the movie, Humphrey Bogart and his pals are surrounded by a large band of Mexican bandits who want to rob them. Bogey and the boys aren’t interested in having the treasure of the movie’s title taken from them. The bandits claim they are the police, and Bogey says, in that case, let’s see your badges. The reply is (slightly misquoted): “Badges? We don’t need no stinkin’ badges!” The reality of Bogart’s situation is that he is surrounded by men with a lot of guns — when you have the guns, you don’t need no stinkin’ badges.
But Washington doesn’t have the regulatory guns necessary to deal with the status quo. They need the stinkin’ reform. Without some of the changes being suggested, what’s to stop the country from plunging into the mire just as it did in autumn 2008?
Take the CFPA. One of the things its opponents are ignoring is that there is a looming credit crisis that’s even bigger than the one that swamped the economy in 2008. The 2008 crisis was caused by subprime mortgages. An even larger pile of debt exists in what are called Alt-A and Option-ARM mortgages, and they will be resetting beginning in the second quarter of 2010 (that’s next month!) and continuing through 2011. Those could be very ugly months indeed.
Let me repeat that: A larger pile of debt (than the 2008 pile) is threatening the country starting next month.
And many people who took out all of those ridiculously risky mortgages are going to default on them, just like the sub-primers did. Any institution holding mortgage-backed securities formed out of these babies is in bigger trouble than it was in 2008.
But we don’t need to protect consumers from themselves. If they want to take out risky mortgages (no income verification, etc.) and default and be foreclosed, that’s their problem. And if banks want to profit off the mortgage fees, that’s their right. And if the banks repackage and resell the mortgages for more profit, that’s their right. And if other institutions want to sell credit-default swaps (a bet that the financial instrument, in this case the mortgage-backed securities, will go bad) and cause more risk in the entire environment, will that’s okay too. It’s a free market, after all.
And then as the markets react to the housing foreclosures and the bad debt, and consumers are forced to cut spending due to the fact that they are up to their eyeballs in debt, companies are forced to make layoffs ’cause business is bad.
But don’t worry folks: We don’t need no stinkin’ reform.
When you get right down to it, how does a collapsed economy compare to the awful ogre of government intervention?