Sat, Dec. 07

Letter: There is plenty of blame to go around


In a recent letter, Jim Barber raises some good concerns about the stimulus package Congress is considering. He also writes that government intrusion in the economy (the New Deal) didn't end the Great Depression, the buildup to fight WWII did. This buildup for war was, after the New Deal, the largest government intrusion into the economy.

Critics of government intrusion, though, can't have it both ways, saying on one hand that government intrusion like the New Deal doesn't work and then cite the buildup to war for ending the Depression.

It is speculation that the Depression would've ended naturally around 1936, but we do know that when FDR tried to reign in New Deal spending, industry didn't step up to replace the government's role and the Depression resurged.

Whatever the reasons, private enterprise wasn't prepared to end the depression by the mid-1930s. What the buildup for war shows us is that the New Deal spending was not sufficient & probably not targeted appropriately.

For today's financial crisis, Mr. Barber singles out "stupid" regulations, but many economists consider the repeal of the Glass-Steagal Act as a significant factor.

By repealing this act (passed in the 1930s), higher risk taking was no longer curbed.

The distribution of TARP funds shows the value of regulatory oversight. Most the recipients of the first $350 billion are unwilling or unable to account for the taxpayers' money because there was virtually no oversight of the funds.

Reports by many sources, including Barron's, the Washington Post, NY Times, LA Times, Business Week, MarketWatch, the WSJ, find many other reasons in addition to government regulations for our crisis, including poor judgment by borrowers and lenders, speculation, high personal and corporate debt, lack of government regulation, failure of due diligence, increasingly complex, opaque, and riskier financial products, and decision-makers and regulators downplaying the risks being taken.

Many of these same sources find that the role of Fannie Mae and Freddie Mac was important because they were way undercapitalized, but compared to other lending institutions Fannie and Freddie loans were less risky and their portfolios contained a smaller percentage of these risky loans.

Contrary to Mr. Barber's letter, these two agencies weren't created to encourage risky loans.

The Clinton and Bush administrations both encouraged the entire mortgage industry, not just Fannie & Freddie, to increase home ownership.

It seems to me there is plenty of blame to go around for the malfeasance, misjudgment, reckless managing and greed that contributed to our current crisis.

It is solely an ideological viewpoint that selects regulation, and Fannie & Freddie, as principle causes.

Joe Stack


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