Bailout, Say Hello to Regulation

The Free Market Party Bus has driven off the road. The troopers are arranging for a major cleanup of the wreck, and the team of drivers are undergoing a full battery of breathalyzers and blood alcohol tests. In the meantime, traffic is backed up from the scene of the accident in Manhattan. The jam appears to stretch clear across the country, through California, on to Shanghai and has now stopped traffic as far away as London. Welcome to the New Economy.

It must have been an old fashioned bus because under the hood was a boiler. A simple machine, a boiler heats water, makes steam and uses it to turn the drive shaft. Imagine the bus is the economy and the boiler produced the steam that drove the bus. The bus ran fine until the drivers got sauced and drove it around deadman’s curve and off the road. Sound familiar? It’s that simple.

Financial businesses of all sorts from banks and investment companies to shadowy credit houses are all under the gun these days. The cry for years was “Down with Regulation”. This was followed up with the ever present “we can police ourselves”. Well say it ain’t so Joe, but it ain’t so.

This credit crisis or financial meltdown, call it what you will, is the result of greed. Good old fashioned pedal to the metal, damn the torpedoes and don’t look under that seat greed. Say it again, Henry! Greed caused CEOs of Wall Street firms to bet their entire companies on massive quantities of leveraged assets. Greed caused Sales Managers to push mortgages that were obviously unstable for many consumers. Greed coerced VPs of Underwriting to go with the flow and approve guidelines that allowed lenders to loan large amounts of money to borrowers with no documentation, no pay-stubs, nothing more than a credit score to justify the loan. In this crisis, small profit led to bigger profit, which led to record profit and then to un-tempered greed. Greed is what results when rules are bent or tossed in the name of making more and more piles of money.

Lets not forget the property owners and mortgage holders. Greed cause many to buy more property than they should have in the hope that the price would never drop and they could buy, flip and profit forever. While the housing bubble grew and grew, property investors bought and flipped house after house, never believing it would end with them holding the bag. Greed got all of them.

We trusted the super smart people on Wall Street. They told us they knew what they were doing. “Trust us”, they said. “We all have MBAs and we are really smart. We would never let anything bad happen on our watch.” They repeated this line over and over, even after greed knocked on the door. Then those super smart guys didn’t look so smart at all.

History repeats itself, over and over and over again. The late 20’s, the early 70’s, the late 80’s, the late 90’s and now 2008. Recessions and depressions have been part of the economic cycle since humans learned how to trade goods and pass money. Financial panic returns over and over.

Let us return to the subject of regulation. I don’t like regulation any more than the next person. Regulation comes to an average American in all forms, but nothing is more simple than a rule requiring I get my automobile inspected every year. It is a pain in the butt and it costs me money, but the alternative is a large number of vehicles on the road which are mechanically unsound and dangerous to their occupants as well as the rest of us on the street.

Despite what all the free market prophets have told us, it appears that the financial industry is not capable of policing itself. Regulation and oversight is not an option, the only option is how deep the regulations go. Government must step in and establish new oversight in order to ensure that our economic system is not undermined by our own smart financial people. Who needs a terrorist to blow up our system when Wall Street super smart big heads will do it all by themselves.

Perhaps one of the most important purposes of the Federal government in our times is to protect our economy from those who would drive it to great heights and then over the edge into the river. The government did not tell any of these lenders or investors what investments to buy or sell. President Bush and Speaker Pilosi did not tell any of these Wall Street houses to go bet the farm and leverage their assets. The politicians only agreed to let the Financial Industry police itself. And look what happened.

In conclusion, the United States has the greatest and most fantastic economic system ever devised. We are blessed to have the opportunity to live in a country and system which offers so much opportunity and financial blessing. However, isn’t it time we all recognized that the secret is to run the boiler at the proper temperature and pressure. That is the essence of regulation. Keep the boiler running smoothly, without blowing the seams.