Monday, October 27, 2008

Democrats Must Share Blame for Worst Financial Crisis

The Bush administration has been the target of attacks by Democrats for the international financial crisis that began on Wall street earlier this year. The critics' main argument is that the Bush-era anti-regulation environment allowed unregulated derivatives contracts, called "weapons of mass destruction" by Warren Buffett, to grow into a mushroom cloud.

While it is true that the dramatic growth of derivative contracts such as credit default swaps happened on Republicans' watch, the fact is that the seeds of the current crisis were sown during Clinton years. It all began with an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.

It not only removed derivatives and credit default swaps from the purview of federal oversight (on page 262 of the legislation), Congress prohibited the state and local governments from enforcing existing gambling and bucket shop laws against Wall Street.

As the recent CBS 60 Minutes segment explained, "In retrospect, giving Wall Street immunity from state gambling laws and legalizing activity that had been banned for most of the 20th century should have given lawmakers pause, but on the last day and the last vote of the lame duck 106th Congress, Wall Street got what it wanted when the Senate passed the bill unanimously." Though CNN has only picked Senator Phil Gramm as one its top 10 Culprits of Collapse, the entire senate is responsible for it.

Clearly, the unanimous Senate passage of the Commodity Futures Modernization Act of 2000 demonstrated the power of Wall Street over both Republicans and Democrats. In fact, the data of the financial services industry's recent campaign contributions shows that two of the top three recipients of the largess from Wall street are Democrats Barack Obama and Hilary Clinton. John McCain is in a distant third position. Overall, Sen Obama's campaign is awash with record, massive cash contributions.

Since the current financial crisis has its roots in easy, plentiful mortgages and the housing bubble facilitated by the Democrats' unabashed and reckless support for home ownership via Fannie and Freddie and community re-investment legislation, a larger share of the blame for the current crisis should be assigned to the Congressional Democrats such as Barny Frank and Chris Dodd.


Anonymous said...

There is a lot of discussion that the root of the financial crisis is in the hands of one group or the other; but in reality the real culprit is our collective ego.
The “anti-regulation” environment is not just the basis of the crisis but merely a part of the imbalance that is brought about through our individual and collective will to receive for ourselves alone.
What we forgot when all these schemes were being hatched is that we are now a “global community” and therefore we are tied to one another in a myriad of ways.

Michael Laitman PhD has a unique view on the crisis

Riaz Haq said...

Here's Alan Greenspan's explanation as carried in Newsweek by columnist Robert J. Samuelson:

Greenspan is in part contrite. He admits to trusting private markets too much, as he already had in congressional testimony in late 2008. He concedes lapses in regulation. But mainly, he pleads innocent and makes three arguments.

First, the end of the Cold War inspired an economic euphoria that ultimately caused the housing boom. Capitalism had triumphed. China and other developing countries became major trading nations. From the fall of the Berlin Wall to 2005, the number of workers engaged in global trade rose by 500 million. Competition suppressed inflation. Interest rates around the world declined; as this occurred, housing prices rose in many countries (not just the United States) because borrowers could afford to pay more.

Second, the Fed's easy credit didn't cause the housing bubble because home prices are affected by long-term mortgage rates, not the short-term rates that the Fed influences. From early 2001 to June 2003, the Fed cut the overnight fed-funds rate from 6.5 percent to 1 percent. The idea was to prevent a brutal recession following the "tech bubble"—a policy Greenspan still supports. The trouble arose when the Fed started raising the funds rate in mid-2004 and mortgage rates didn't follow as they usually did. What unexpectedly kept rates down, Greenspan says, were huge flows of foreign money, generated partially by trade surpluses, into U.S. bonds and mortgages.

Third, regulators aren't superhuman. They can't anticipate most crises, and even miss some massive frauds when evidence is shoved in their face: Bernie Madoff is Exhibit A.

Given regulators' shortcomings, Greenspan favors tougher capital requirements for banks. These would provide a larger cushion to absorb losses and would bolster market confidence against serial financial failures. Before the crisis, banks' shareholder equity was about 10 percent: $1 in shareholders' money for every $10 of bank loans and investments. Greenspan would go as high as 14 percent.