GOP protects banks from regulations

It’s an interesting stance.  Will using the word ‘bailout’ fool and scare some people into backing the Republicans in doing nothing?  Will the Republicans be able to make regulations the enemy — regulations against the entities that stuck it to Americans, regulations that will prevent them doing it again?

We all know what opposing regulations says about the GOP, but doesn’t it bring up questions about what it says about Americans?  The sharp partisan differences over how to respond to the 2008 crisis that caused a near meltdown on Wall Street should remind us of the need for regulations, and we should all pay careful attention.  None of us, no matter our political philosophy, should allow nothing to be done — nothing isn’t a solution!


Filed under Economics, Financial Rules & Regulations, Playing Politics

27 responses to “GOP protects banks from regulations

  1. I’m curious…given your stated point of view, how would you narrate, or explain, the unfolding of the current economic downturn? It seems that you hold the position–an often repeated one–that “unregulated business run amok” was the cause. If that is, in fact, what you believe, I would ask ask you to research the Community Reinvestment Act and the ever growing opinion among economists that it–a far-reaching piece of government regulation–was the single, biggest contributing factor to the economic collapse of 2008. How, exactly, can government regulation solve a problem that was caused by government regulation?

    • I hold the opinion the derivatives market “was the single, biggest contributing factor to the economic collapse of 2008.”

      You would need to bring evidence of your differing opinions.

      • You are entirely correct that the derivatives market–and specifically mortgage backed securities–played a significant role in the meltdown. One needs to look back further, however, to see the true root cause. Ask yourself why banks–who had, for generations, made money off lending to those who could afford to pay them back–would suddenly start lending vast sums of money to people they KNEW could never afford to pay back the principle, much less the interest? After all, the mortgage backed securities that the banks used to unload these “toxic debts” didn’t even exist until YEARS after most of these mortgages were approved and contracted, so the banks didn’t expect to turn a profit from unloading them on the derivatives market when they initially wrote them.

        The answer lies in a seldom-talked-about piece of government regulation known as the Community Reinvestment Act. Signed by Carter and then vastly strengthened by Clinton, the act said that any FDIC insured supplier of mortgages was REQUIRED by federal law to lend a certain amount of their capital to those who had previously been considered “unfit” to borrow. This was aimed at giving low-income, non-traditional earners, and “disadvantaged” Americans the ability to own a home. Suddenly, banks had no choice but to give their money to people it knew would default–or face federal penalty. What were they supposed to do? They wrote the risky loans, then they did everything legally possible (and don’t forget that it WAS legal) to unload those debts on someone else–enter the derivatives market.

        In short, if the government had just allowed private business to act freely of intervention and toward its own best interests, those loans would never have been contracted, the sub-prime mortgate market would have never emerged, and nobody would know what a “mortgage-backed security” even is.

      • I’m well aware of the limitations of wiki, yet usually find it a good place to start..

        So, here’s what wiki says in part about the Community Reinvestment Act —

        “The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.). To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.).[6]”

        I see no place where your ‘spin’ about being required isn’t tempered by good solid banking principles. Some may not have used those good solid principles, but they made those judgments on their own, not due to regulations!

      • We could each find long lists of instances where taking advantage of legal activities was used to make someone money. And often several of the items on our lists would have been the beginning of the process to change the laws, write new laws, tighten laws to prevent the ways used to take advantage.

        We know we were taken advantage of, and those who did made lots of money from it, now it’s time to make sure it doesn’t happen again!

        Since this current recession began (officially) in December of 2007 it has been studied, and steps to prevent it happening again are in order.

        I am all for learning from history, much less for simply placing blame.

    • I truly would be interested in hearing your theory that government regulations are what caused the economic collapse of 2008.

  2. In addition to using the words, ‘bailout,’ and ‘too big to fail,’ often enough to fool people about what the legislation does and doesn’t do, I hear Republicans saying they are left out of the talks.

    Is this all they have? They tried this stupidity by saying they were locked out of the talks about health care reform. The talks that went on for more than a year and all viable solutions or ideas they brought were incorporated into the legislation! Still they screamed at the top of their lungs how they were left out.

    The floor debate on financial reforms is supposed to begin soon — within the next couple of weeks — so shouldn’t the Republicans be forming ideas and solutions and alternative plans rather than screaming criticisms? Shouldn’t they wait to participate in the floor debate before they scream they weren’t included?

  3. Wouldn’t it be to the Republicans advantage to be part of this badly needed financial regulation legislation?

    Instead they seem to be visibly afraid that something that benefits the American people will be accomplished. Most of us have figured out what scares them most is any accomplishment that may be credited to President Obama and the Democratic majorities — they’re afraid to the point they’re willing to cut off their noses to spite their faces, and hurt every American citizen with their opposition!

  4. Monkeyhawk

    The only issue that matters is “If Obama is for it, we’re against it.”

    I trust most people are realizing that. Not all, of course, but most.

    • Sadly, I agree. More sadly, I see Americans who think that is a great strategy. Do nothing, bear no responsibilities — hope you are spared the blame, risk being spared the credit.

  5. As you supposed, the problem comes from your source of information. Wikipedia does a decent job of explaining the broad strokes of the CRA, but it doesn’t tell you the larger story. Economist Russell Roberts wrote a fantastic piece in the Wall Street Journal in October of ’08 that explains it better than I could hope. Here is the link:

    You’re right that independent banks had SOME flexibility in how they chose to operate under the CRA guidelines. However, the idea of “sound business practices” is ludicrous because the banks were already engaging in sound business practices by NOT lending to people who couldn’t afford it. The bigger problem, however, was Fannie and Freddie. As government owned entities, they didn’t have the freedom to operate under the CRA that other banks had. They were given hard quotas by the government that they HAD to meet for the percentage of their capital that was loaned to the “disadvantaged”. By 2005, the quota was 52%. That means that over half of Fannie and Freddies money was committed–by the federal government–to mortgages for people with incomes that did not support their proposed loan applications. Since Fannie and Freddie combined owned over HALF of all the mortgages in America, you can see how this type of government mandate easily created the toxic debt market I mentioned earlier.

    • Your information places the blame, and even without studying it I will accept that it played a part — you present credible evidence. There seems to be enough blame to spread around and we agree the derivatives market is one area deserving blame.

      You think because one law may have had unintended consequences there shouldn’t be laws? Why do you think there shouldn’t be regulations to prevent this happening again?

      Haven’t you proven to your own satisfaction it happened? Why do you think someone else won’t get in on this money making idea if it’s not regulated?

      • I would be fine with federal regulation of economic activity if it were effective. The fact is, it isn’t. An unregulated, voluntary, free-market economy will–with small deviations–maintain an equilibrium that represents the best conditions one could hope for. This is the fouundation of the Austrian School of Economics–a philosophy that, I believe, best explains the way economies actually work. The best that government regulation can ever hope to accomplish is to reproduce the conditions that the free-market would have produced on its own if left alone. At the risk of getting longwinded, let me give you an example.

        In an unregulated, voluntary, free-market economy, supply and demand meet to create price. Labor is a commodity that is bought and sold just like anything else. So, in this hypothetical example, the demand for labor (employers hoping to fill open positions) and supply of labor (those looking to be hired) reach a natural equilibrium. In an unskilled labor market, like a McDonalds, this “natural” wage will probably be quite low. Let’s say $6 an hour. Now, let’s bring in the Federal government with the Minimum Wage law. If they set the minimum wage at $5 an hour, the law does nothing. The market continues to function as it always has because McDonalds knows that in order to fill all its open positions, it has to pay $6 an hour. If the government sets the minimum wage at $6 an hour, then they have only reproduced the same conditions that would have existed without their interference. If, however, the government sets the minimum at $7 an hour, then the supply of labor (people wanting jobs at McDonalds) will go UP because of the higher wages. Meanwhile, the demand for labor (the number of employees that McDonalds is willing to hire) will go down because of the rising cost of employing as many people. So, the result, is higher unemployment as current workers are laid off due to increased overhead and people who might have been happy to stay out of the workforce (stay at home moms and dads for example) start applying for jobs because the minimum wage is now higher. A labor surplus has been created by government intervention.

        This is ALWAYS how government interventinon in the free market works. Unintended consequences are the rule–not the exception–and if the government did a PERFECT job, they would only be reproducing what would have been accomplished naturally without their involvement. Government should restrict its interference in the economy to protecting property rights and enforcing contractual promises–anything else results in a net negative effect.

      • Ah, John, I’ll have to tell you we will need to agree to disagree. I’ll respect your right to your opinions, please respect mine.

  6. Republicans don’t head committees because they aren’t in the majority, but there is a floor debate on everything that comes out of committee.

    Why are they already saying they’re left out of the debate? It hasn’t yet begun!

    Why is it acceptable for them to simply oppose and not offer ideas, solutions, alternate plans?

  7. Once we’ve formed our own opinions we find whether or not they have merit by defending them. And often we find the holes too. Listening to the differing ideas shows us what we didn’t consider and should have. Then we throw out the chaff and keep the best. Isn’t that what governing is supposed to be? Why do we have to split up into opposing teams and only work toward winning or making sure someone else is the loser? Don’t we all lose with this strategy?

  8. Zippy

    Sigh. . this standard Libertarian talking about the CRA was discussed to death over at WEBlog. Roberts’ WSJ article was a bit more nuanced of course, it is nonetheless larded down with ideological references to a “free lunch”–as if these people were getting something for free. I

    t should come as no surprise that he is a Libertarian economist, and an admirer of Hayek (what’s with the ‘u’, John?).

    Conflating fair deals for the poor with subprime loans is intellectually dishonest.

    But enough: since Wikipedia was mentioned, well, here’s some interesting tidbits:

    Conservatives and Libertarians have also debated the possible effects of the Community Reinvestment Act (CRA), with detractors claiming that the Act encouraged lending to uncreditworthy borrowers,[114][115][116][117] and defenders claiming a thirty year history of lending without increased risk.[118][119][120][121] Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified low-income borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime.[122][123]

    Both Federal Reserve Governor Randall Kroszner and FDIC Chairman Sheila Bair have stated their belief that the CRA was not to blame for the crisis.[124]


    Economist Paul Krugman argued in January 2010 that the simultaneous growth of the residential and commercial real estate pricing bubbles undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes.[126]

    And with that, I’m done.

  9. We do encourage a free exchange of ideas, and information. From there, we also respect that each person is able to draw their own conclusions.

    So, the free markets is why the banks should be allowed to continue having the ability to crash the world’s economy?

  10. “The Senate is expected to vote within weeks on the reform bill, which Obama said would “hold Wall Street accountable” and put rules in place to prevent any more taxpayer-funded bailouts of companies in trouble.

    “Never again will taxpayers be on the hook because a financial company is deemed ‘too big to fail’,” Obama said in his weekly radio and Internet address.”

  11. Tweaking laws and regulations is acceptable and I support that happening!

    I’m sure those who want to take advantage will start tearing any new laws and regulations apart in an attempt to find where any loopholes for opportunity might exist.

    They’ll show us where more tweaking might be needed.

    At least we won’t be static or going backwards!

    Doing NOTHING is not a solution!

  12. Zippy

    Yes, indeed, Fnord: Business-as-usual is, frankly appalling. And it’s not just the GOP (though, they of course, are most the vigorous defenders of doing nothing). It’s the whole financial culture of Washington.

    Recent example: it’s been widely reported that Goldman-Sachs got nine months notice before charges were filed against them. I certainly get the idea that securities law is complex, but what other defendants get that kind of pre-shredding privileges?

    The comments on such stories (predictably) rail about Democrats, but I found out this, apparently, is a common SEC practice that, incredibly is not legally required.

    While there is no rule or regulation that requires that a prospective defendant be given the opportunity to address the decision maker prior to the filing of an action, in 1972, SEC Chairman William J. Casey appointed a committee (chaired by John Wells and commonly referred to as the “Wells Committee”) to review and evaluate the Commission’s enforcement policies and practices. Among the recommendations made by the Wells Committee was the following:

    Except where the nature of the case precludes, a prospective defendant or respondent should be notified of the substance of the staff’s charges and probable recommendations in advance of the submission of the staff memorandum to the Commission recommending the commencement of an enforcement action and be accorded an opportunity to submit a written statement to the staff to be forwarded to the Commission together with the staff memorandum.

    Although the SEC did not adopt many of the recommendations of the Wells Committee it did adopt this recommendation, and the notice is now known as a “Wells Notice” and the prospective defendant’s response is a “Wells Submission.” The NASD also uses a form of the procedure in its investigations.

    It gets weirder. You recognize the name William J. Casey? Let’s just say he went on to other things (i.e. running the CIA during most of Reagan’s presidency). He died before any final conclusion could be made. But:

    There is evidence that Casey played a role as a Cabinet-level advocate both in setting up the covert network to resupply the contras during the Boland funding cut-off, and in promoting the secret arms sales to Iran in 1985 and 1986. In both instances, Casey was acting in furtherance of broad policies established by President Reagan.

    There is evidence that Casey, working with two national security advisers to President Reagan during the period 1984 through 1986 — Robert C. McFarlane and Vice Admiral John M. Poindexter — approved having these operations conducted out of the National Security Council staff with Lt. Col. Oliver L. North as the action officer, assisted by retired Air Force Maj. Gen. Richard V. Secord. And although Casey tried to insulate himself and the CIA from any illegal activities relating to the two secret operations, using there is evidence that he was involved in at least some of those activities and may have attempted to keep them concealed from Congress.

    I’m not suggesting there’s a connection, other than a similarly cavalier attitude toward government regulation.

    And we’ve seen the results.

  13. Zippy

    P.S. By the way, thanks to everyone who has expressed support for Bill Salter’s primary challenge in Arkansas.

    There’s little question that this motivated Senator Blanche Lincoln’s bill to ban derivatives and, while the devil is in the details (what do we do with the existing mess?), I fully support that in principle.

    Turning investments into a casino based on complex mathematical formulas ensures that outmoded metrics like actually, ya know, doing something useful to produce a profit, become irrelevant.

    It’s much worse than a casino. I suppose both have some entertainment value (to some), but at least it’s clear in a card game what’s being gambled, and what the goal of the game is.

    With derivatives, the game is the goal.

  14. indypendent

    I’ve heard this line about all those unworthy people getting mortgages but yet I don’t hear of any real estate agents, brokers or the local banks that lost money on those deals – now did they?

    It seems with each one of those bad mortgages each person down the line got their piece of the pie and did not care when they passed the bad loan down the line to the next guy.

    Unfortunately, the last guy in that line was the US government since most of those bad mortgages were backed by the US government.

    So, pray tell, how many banks went belly up because of those bad mortgages?


    Be sure to watch the video of a Broadway song that sums up the horrible mess we have on Wall St.

  16. Another GOP Senator says they’ve been left out of the talks on financial reform before the talks even begin! Do their constituents fall for these stupid excuses? They seem to think all they need to do is say scary stuff. Really makes those who believe whatever they say seem very easily fooled!

    “WASHINGTON – Senator Scott Brown said this morning that he would join a Republican filibuster to block a package of financial overhauls from coming to a vote in the Senate, potentially providing GOP allies with the ammunition they need to stifle the Democrats’ plan designed to crack down on policies that lead to the economic meltdown.

    Brown, in his first Sunday morning talk show appearance since being sworn in three months ago, also accused President Obama of playing politics with the issue and said that Democrats were not doing enough to work with the other side of the aisle.

    “I think the president’s political arm is now taking over this debate,” Brown said during a 13-minute interview on CBS’ “Face the Nation.” “And it’s unfortunate because I, like many others in my state and throughout the country, want banks to be banks. They don’t want them to be casinos. They don’t want them to take risky bets on our money.”

    Brown also said the bill would harm some Massachusetts companies because the “web” of new investing rules would sweep up insurance firms Liberty Mutual and MassMutual. Without elaborating or explaining where he got the estimate, Brown also claimed the bill would cost 25,000 to 35,000 jobs.

    Attacking the legislation as a job-loser in a shaky economy would be a new approach for Republicans, who have been far more focused on portraying the financial overhaul as one that could provide further bailouts to big banks. Brown did not mention that leading attack, which was launched last week by Senate Minority Leader Mitch McConnell and has been pilloried by Democrats as “cynical” and “misleading.”

    Financial regulatory reform is expected to grip Washington over the next several weeks as Senate Democrats determine whether they should alter their current plan to appease Republicans, or dare them to vote against a plan that is meant to crack down on unpopular Wall Street firms. The House has already passed its bill, which was drafted by Representative Barney Frank of Newton, chairman of the Financial Services Committee.”

  17. indypendent

    I watched Scott Brown this morning and what I got from him was a bunch of dancing around the questions asked of him and never once did he directly answer a question on his own.

    Bob Schieffer (sp?) did pin Brown down on a few questions but even then – Brown turned into a pretzel from all the twisting he did to get out of answering some very basic questions.

    I found it interesting that the Republicans’ attack on Obama for financial reform is Obama’s politicizing this issue.

    I gather this is because Obama said yesterday that Mitch McConnell had met with Wall Street executives last week and now he is opposed to financial reform?

    Well, Mr. Brown and Mr. McConnell – is it true that Mitch met with those Wall Street executives or are you just mad because Obama had the guts to call you on that fact and let the cat out of the bag that you’re in the backpockets of the very same Wall Street fat cats that you profess to hate so much?