Phil-osophically Speaking: October 20, 2011


Barking up the Wrong Tree Is One of America’s Oldest Sports

So what are we to make of this “Occupy Wall Street” movement? Is it “much ado about nothing” or does its global momentum signify something important? One hears echoes of the counter-cultural movement of the ’60s. Back then it wasn’t the money changers on Wall Street per se, but the establishment and the parents who were responsible for everything that was wrong with the world.   Bromides such as “Don’t trust anyone over 30” passed for folk wisdom; but today’s protesters have plenty of graying and balding “Baby Boomers” in their ranks who are caught up in reliving the days of yore. 

They’re against greed in the same way they used to be against war. Who isn’t? But why does this smell like a pit stop en route to stamping out capitalism as if it was some pathogenic menace; or, at the very least, an attempt to smother it with onerous regulations. Capitalism created the rich but it also created electricity, automobiles, computers, Steve Jobs and all the tech devices that promote the kind of spontaneous social movements dissenters flagrantly parade about. It shaped their very existence; because of it their generation is living better, healthier and longer lives.  

I feel sympathy, of course, for the multitudes that cannot find jobs. It’s said for every available job there are five college graduates. That’s deplorable; but most of these unemployed neophytes were transfixed by the magic of the moment in 2008, and voted for perhaps the most left of center candidate that has ever successfully ran for president. So now we have unemployment officially listed at 9.1 percent; but everyone knows it is considerably higher. The country is feeling the strain of the non-working and so are global markets, which have given this downtown N.Y.C. imbroglio an international flavor.

Here’s some homespun wisdom my mother often told me: “If you want a helping hand in life look at the end of your sleeve.” That’s what I did as a college student in 1980, when I used that hand to push the lever down for Ronald Reagan, doing both myself and my elders a great favor. For the next 20 years, America grew stronger and more prosperous. The 21st century, however, has been a harsh mistress. With one decade of productivity lost and another saddled with chronic unemployment and exiguous economic growth, I can understand why frustration and hopelessness turned into cold fear. But is Wall Street the reason for this calamity or are people engaged in that old pastime of barking up the wrong tree?

According to the protester’s narrative, the financial collapse and deep recession were caused by the greed of the private sector, which was inadequately regulated. Greed, of course, has been around as long as humanity. But with an all too credulous media embracing this interpretation, it is no surprise that the unemployed and underpaid want to use the rich cats on Wall Street as a piñata doll. You can blame Wall Street all you want for the reckless gambling on mortgage backed securities, but that risk would have never metastasized if the federal government was not compelling banks to lower their lending standards, creating the now infamous housing bubble.

Avarice, we are told, was licensed by repealing provisions of the Glass-Steagall Act of 1933 signed into law by President Clinton in 1999. The act prohibited commercial banks from engaging in investment-banking activities, which they saw as responsible for the speculative fever that caused the 1929 crash and the Great Depression. Because of this repeal, so the argument goes, financial institutions consolidated enabling them to take on more risk since it created the illusion they were too big to fail.  

The facts tell a different story. After the repeal, investment banks did not merge with commercial banks and the few that had did not weather the ensuing storm. The real problem was the bursting of the real estate bubble that massively deflated housing prices hurtling Fannie and Freddie Mac into insolvency. Shell-shocked investors sought cover from these shattering losses by opting for mortgage backed securities where mark to marketing accounting (an archaic and destructive accounting rule) forced banks to write down mortgage backed assets to well below their value. This was the reason so many banks failed during the Great Depression and why so many were hurt in this crisis. It was not, as popularly believed, “Quantitative easing” (fiscal stimulus) but the ending of mark to marketing accounting that arrested the seismic aftershocks.

The government’s subsequent rescue of Bear Stearns calmed the market temporarily but it also signaled that large financial institutions would be rescued giving them a false sense of security. When the U.S. Treasury surprisingly allowed Lehman Brothers to fail, a full-blown panic stampeded investors who withdrew their funds from the institutions holding large amounts of Municipal Backed Securities. The upshot was that cash was hoarded against the risk of additional withdrawals, freezing the credit market and placing a stranglehold on lending, the very grease that lubricates the economy.

These events are neither murky nor cloistered in academic doublespeak; it’s as clear and transparent as a smooth pane of glass. In 1992, the government required Fannie Mae and Freddie Mac to direct a significant portion of their mortgage financing to borrowers who were at or below the median income in their communities. The quota was first set at 30 percent, but then HUD Secretary Andrew Cuomo irresponsibly spiked it to 50 percent and under George W. Bush it ultimately skyrocketed to 55 percent.

This policy met the objective of moderately increasing home ownership, but at the price of Fannie and Freddie lowering their underwriting standards in order to finance more than half of its mortgages. Too many loans were made to high-risk borrowers: low incomes, poor credit and with little and sometimes no down payment. Under this unsteady scaffolding, the biggest housing bubble in American history was constructed. Rising real estate prices camouflaged defaults and delinquencies giving a false sense of security. Meanwhile, the Federal Housing Administration was competing for the same mortgages as Freddie and Fannie and by 2008 about half of the 27 million mortgage loans were subprime. Once the bubble burst, as all bubbles eventually do, there was hell to pay. And we’re still paying.

There were other factors that turned the American dream into a nightmare. Alan Greenspan, the then-Federal Reserve Chairman, kept interest rates insanely low for too long. Then there was Barney Frank, the House Banking Committee’s most influential member. His fantastically seductive credit deals set asunder the marriage between common sense and mortgaging real estate. If Frank’s financing infidelities were not damaging enough, the “Dodd-Frank Wall Street Reform Bill” to remedy his committee’s excesses is the worst thing to happen to banks since Bonnie and Clyde. These burdensome regulations not only hurt banks but responsible borrowers.

The private sector also shares a portion of the blame. Why? Greed, of course. Investment banks saw the opportunity to make money and created mortgage backed security derivative products and then sold them to their investors as a way to garner cash and diminish risk. Nor can we ignore anxious homebuyers who saw real estate as defying gravity; something that goes up but never comes down. The kill the plutocrats’ sloganeering blinds itself to the true nature of our fiscal meltdown and crippled economy. When people face gnawing uncertainty, they don’t carefully evaluate the evidence but jump to conclusions that lead them to say and do foolish things. Greed notwithstanding, if the Federal Government was not browbeating banks to preposterously lower their lending standards no outlandish risk would have existed to exploit. As the baseball sage Casey Stengel once said: You can look it up! 


Leave a Reply