"Banks and mortgage lenders are placing top priority on killing President Obama's proposal to create a new consumer protection agency that would regulate home loans, credit card fees, payday loans and other forms of consumer finance...
[I]ndustry executives vowed on Tuesday to fight Mr. Obama's plan with everything they have, even though banks are still heavily dependent on many taxpayer-supported loans and loan guarantees to get through the crisis."
-- Edmund L. Andrews, New York Times, July 30, 2009.
We are living through the most serious financial crash since the Great Depression. The problems of the financial sector pushed the rest of the economy off the cliff. Jobs are disappearing and millions of home buyers are having a great deal of difficulty making payments. Tens of thousands are walking away from their homes.
Too many of these home buyers got in over their heads because mortgage lenders engaged in questionable practices. Mortgages of all shapes and sizes hit the market, including dangerous adjustable loan packages; teaser rates; no income verification; no down payment; interest only; interest tacked on to principal; predatory loans; loans to dead people. It didn't matter as long as the loan got made.
Why? Because Wall Street set up a fabulously profitable securitization business that needed those mortgages in order to create vast pools to chop up and sell. These pools, combined with derivatives, created layer after layer of synthetic securities that earned Wall Street billions upon billions in fees. This was its most profitable enterprise and it drove the mortgage and housing markets to dazzling heights... until it crashed. (See The Looting of America for a walk on the wild side of this dangerous game.)
When unsustainable growth in housing prices began to stall and then reverse, the whole edifice of fantasy finance came crashing down with it. By September 2008, we were in a real panic as the financial market froze. The real economy, so dependent on credit, crashed as well. Trillions of dollars of tax payer dollars in the form of TARP funds and asset guarantees flooded into Wall Street in order to keep us from the next Great Depression. We put the entire financial sector on the dole.
All of this happened because we engaged in a grand experiment starting in the late 1970s. We decided that the best thing for our economy was to move money to the super rich and to deregulate the financial sector. This would lead to more investment and all boats would rise. Instead we sunk the Titanic.
Wages for the average worker, after inflation, have declined. Household debt increased. The super-wealthy took more and more of their money and bought up Wall Street's fantasy finance securities.
It's is the most expensive failed experiment in history.
Part of the cure is to re-regulate the financial sector. The proposed Consumer Financial Proteciton Agency is designed explicitly to protect us from the next round of mortgage mania. But the captains of Wall Street, who are being propped up by our tax dollars, have set up an enormous lobbying effort to kill it.
With a straight face they are telling us that they don't need to be heavily regulated -- that regulations will kill innovation and stifle consumer choice. And they're not kidding. What's worse is that our tax dollars are paying for their lobbying efforts. Most of them -- including many that did not receive direct infusions of taxpayer dollars -- would have gone under had we not bailed out AIG, Bank of America, Citicorp, and their ilk.
It's more than gall. It's more than chutzpah. It's precisely what happens when we turn over the wealth of our nation to a tiny handful of elites. It is truly incredible that they want to fight the proposed consumer agency with "everything they have," when right now what they have is what we are giving them.
It's the oldest story in the world: Elites think that taking what they want for themselves is good for everyone, always, without question. But in this case they are acting so selfishly that it could create an enormous backlash. Or as my editor put it, "If ever there were a compelling argument in favor of nationalization, even if just temporary, this is it. I mean, jeez Louise!"
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.