PHA-Exch> FW: [corp-focus] Deregulation and the Financial Crisis

[David Legge]

Sorry for cross posting but Weissman's analysis of the US financial crisis is worth reading, in particular his list of four regulatory failures.  Clearly the decline is more complex than simply the 'sub prime mortgage crisis' as the daily press keeps reporting.  
 
Actually Weissman's analysis is very US focused and fails to consider the international dimension, in particular, the failure of the IMF to exercise any discipline over what the UN Dept of Economic and Social Affairs calls the structural imbalances in the global economy (http://www.un.org/esa/policy/wess/past-issues.htm); definitely worth a read.
 
dl

________________________________

From: corp-focus-admin at lists.essential.org on behalf of robert weissman
Sent: Wed 2008-01-23 2:33 AM
To: corp-focus at lists.essential.org
Subject: [corp-focus] Deregulation and the Financial Crisis



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Deregulation and the Financial Crisis
By Robert Weissman
January 22, 2008

It would be nice to write off the current crisis on Wall Street and
global financial markets as something that only matters to the investor
class.

Unfortunately, the effects are already being felt in lower-income
communities around the United States. Worst-case scenarios for what
spins out from the U.S. mortgage meltdown are truly frightening -- a
severe world recession is a distinct possibility.

Whether such worst-case scenarios can be averted, or softened -- and
preventing the recurrence of similar crises in the future -- depends on
abandoning the laissez-faire financial regulatory regime entrenched over
the last decade.

The current crisis is the predictable (and predicted) result of a
massive U.S. housing bubble, which itself can be traced in part to
global economic imbalances that could have been prevented.

At least five distinct regulatory failures led to the current crisis.

Regulatory Failure Number One: Failure to Manage the U.S. Trade Deficit.
The housing bubble (as well as the surge in leveraged buyouts of
publicly traded companies ("private equity")) was fueled by cheap credit
-- low interest rates. One reason for the cheap credit was an influx of
capital into the United States from China. China's capital surplus was
the mirror image of the U.S. trade deficit -- U.S. corporations were
sending lots of dollars to China in exchange for the cheap stuff sold to
U.S. consumers.

Regulatory Failure Number Two: Failure to Intervene to Pop the Housing
Bubble. Along with an influx of capital, Federal Reserve policy kept
interest rates very low. There were good reasons for the Fed Policy, but
that did not mean the Fed was helpless to prevent the housing bubble. As
economists Dean Baker and Mark Weisbrot of the Center for Economic and
Policy Research insisted at the time, Federal Reserve Chair Alan
Greenspan simply by identifying the bubble -- and adjusting public
perception of the future of the housing market -- could have prevented
or at least contained the bubble. He declined, and even denied the
existence of a bubble.

Regulatory Failure Number Three: Financial Deregulation and Unchecked
Financial "Innovation." A key reason that mortgages were made available
so widely and with such little review of recipients' qualifications was
a shift in which institutions hold the mortgages. Traditionally, banks
made mortgages and held them. In the new era, banks and non-bank
mortgage lenders made loans, but then sold the loans to others.
Investment banks packaged lots of mortgage loans into "Collateralized
Debt Obligations" (CDOs) and then sold them on Wall Street, with a
promise of a steady stream of revenue from interest payments. These
operations were pretty much unregulated. Despite the supposed
sophistication of the investors involved, no one took account of how
shoddy the loans were or -- more fundamentally -- the certainty that
huge numbers would go bad if and when the housing bubble popped.

Regulatory Failure Number Four: Private Regulatory Failure. It was the
job of ratings agencies (like Standard and Poor's, and Moody's) to
assess the CDOs and give investors guidance on how risky they were. They
failed totally, likely in part because they wanted to maintain good
relations with the investment banks issuing the CDOs.

Regulatory Failure Number Five: No Controls Over Predatory Lenders. The
toxic stew of financial deregulation and the housing bubble created the
circumstances in which aggressive lenders were nearly certain to abuse
vulnerable borrowers. The terms of your loan don't matter, they
effectively purred to borrowers, so long as the value of your house is
going up. Lenders duped borrowers into conditions they could not
possibly satisfy, making the current rash of foreclosures on subprime
loans inevitable. Effective regulation of lending practices could have
prevented the abusive loans, but none was to be found.

Unfortunately, the consequences of the mortgage meltdown go far beyond
the foreclosure epidemic, as horrible a toll as that is taking. The
entanglement of the financial sector with mortgage instruments, and the
ripple effects of the housing bubble, has made lenders uncertain of who
even among large corporations and financial institutions is credit
worthy. The resulting credit crunch endangers the functioning of the
global economy. Financial markets are guessing wildly about the
prospects of banks, insurers and other financial corporations, and the
plunging value of stocks poses immediate dangers to the real global
economy.

Less acute, but probably more profoundly, the popping of the housing
bubble is driving down home prices. U.S. consumer demand over the last
five years has been driven by consumers borrowing against the increased
value of their homes; with housing values falling, that process is
working in reverse. The depressed housing market is also ravaging the
construction sector, a nontrivial portion of the U.S. economy. A serious
recession looms as a real possibility.

Mitigating these harms and preventing the worst now depends on active
and interventionist government -- a government stimulus plan, and
aggressive efforts to force lenders to adjust mortgage terms and let
people stay in their homes. Preventing financial panics of the kind now
underway require new standards of transparency and regulation for high
finance. The coming days and months will tell whether any lessons have
been learned.

Robert Weissman is editor of the Washington, D.C.-based Multinational
Monitor, <http://www.multinationalmonitor.org <http://www.multinationalmonitor.org/> > and director of Essential
Action <http://www.essentialaction.org <http://www.essentialaction.org/> >.

(c) Robert Weissman

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