Thursday, September 25, 2008

Politics: Politicians To Blame {Sigh}

TORONTO, ONTARIO - I don't like letting people who behave irresponsibly with money off the hook. In fact, I define "irresponsibly" more broadly than most, claiming that decision-makers (from individual investors to CEO's) should be thinking about the impact of their decisions on the society as a whole, and thinking more about it the larger the decision being made. If the potential consequences to society were not considered, then an irresponsible decision was likely made. Yet, the attempt by many people, most notably politicians, to find someone to blame for the current financial crisis in the United States has led to an inescapable conclusion--those most to blame were the politicians themselves.

The focus of many people, from talk show hosts to senators, has been on finding someone who committed a fraud or other crime that led, directly or indirectly, to the need for a $700 billion bailout plan. Unlike in some other major financial scandals in history (say, Enron), just about everything appears to have been legal. There many have been pockets of illegal activity, but the basic flawed concepts were legal. There was nothing illegal about selling houses with no money down. There was nothing illegal about NINJA loans, or loans to people with "No Income, No Job, and no Assets". There was nothing illegal about "naked short selling," or the practice of selling a stock that one doesn't own under the assumption that it could be bought back later at a lower price (generic short selling) without checking that there was actually stock that could be borrowed for that purpose (the "naked" part).

So, if there was nothing illegal going on, who could be to blame but the people that made the laws? In other words, some of the very people trying to investigate what happened, the politicians, were discovering that the very de-regulation laws that they may have championed in the past generation were actually at the root of the issue. Had regulations been in place, either many of the risky activities would never have taken place, or they would have been illegal, and there would be someone to put in jail for the present situation. It's been stated many times, but Canada has not de-regulated to nearly the degree that the United States has, and indeed, Canada does not have nearly the financial crisis going on that the United States is experiencing.

While there is plenty of blame to go around for the present crisis in both major political parties in the United States, the Republicans obviously have more to lose, as they have been the leading advocates of de-regulation and smaller government. Suddenly, that ideology doesn't resonate with the present reality.

Yet, the fundamental core of the conservative message, that pure markets are the most efficient economic mechanism, has not been repudiated by this crisis. The fundamental problem was that financial instruments became so abstract that market forces were no longer acting directly on the fundamental transaction in real estate, transfer of a home from a seller to a buyer. If they had been, nobody would have been offered a NINJA loan, and people would not have been moving into homes that they could not objectively afford. It may be the ultimate irony that the ideology of de-regulation intended to allow markets to function in pure form actually did the opposite, and distorted the pure market forces. The reality is that there is no such thing as a pure anything when human beings are involved. In the highest-level analysis, that's why we have organized into societies that have laws.

It will take a group of politicians from either or both parties who understand both the fundamentals of capitalist economics and the appropriate role of regulation in maintaining those fundamentals to pass workable laws to keep this kind of crisis from happening again. Considering that the Savings and Loan collapse happened less than a generation ago (remember--John McCain himself was a member of the Keating five during that crisis), there seems to be little hope that it won't happen again.

Of course, saying that the politicians are to blame is tantamount to saying that the common person is to blame, as the electorate is supposed to hold politicians accountable for their decisions. There's a chance to do that in November, and those upset about the situation (as most should be) should think seriously about how to send a message with their ballots.

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