Monday, December 01, 2008

How's that free market working for you?

There are still those who cling blindly to their belief that deregulation works.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.

The administration’s blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

[...]

Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.

Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.

"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
There’s a lot of good stuff here, click through and read.

UPDATE: The failure of conservatism is something that I mentioned in previous posts, here and here (but let’s face it, 90 percent of the posts on this site document the failure of conservatism). Crooks and Liars has a post today that discusses that failure and echoes my sentiment: It wasn’t Bush’s poor execution of conservative principles that destroyed conservatism, it was his successful execution of conservative principles.

There’s no better way to lose a war than to have your on-the-ground decisions be forced through an ideological prism. And it was obvious even to outsiders that this was how Bush was conducting the Iraq war -- indeed, it was the decisive factor behind the very decision to invade in the first place. It’s even more telling that the military minds involved saw that this was occurring too.

But in truth, this constitutes not merely the entire Bush approach to governance, but conservative governance as well. Thus -- to use one example out of many -- during Bush’s tenure there was not a single economic problem that could not be solved by anything other than tax cuts for the wealthy and deregulation of the financial sector.

Of course, we now realize that this was simply a prescription for gobbling PCBs after a diagnosis of cancer.

So when we hear conservatives tell themselves that the reason they lost this last election was their failure to adhere to "conservative principles," we know they’re continuing to cling to the very reason they lost. Because such adherence inherently means that these "principles" -- that is, conservative dogma about how they believe the world ought to be, particularly the insistence that government itself is the problem, when the reality is that bad governance is the problem -- trump their ability to face realities on the ground.
Indeed, as Paul Krugman wrote in May:

Republicans have become the party of denial. If a problem can’t be solved with deregulation and tax cuts, they pretend it doesn’t exist.
In Bush, conservatives had a page just as blank as Sarah Palin. He was coached on the conservative position on every issue and he could be relied on to take that position. And he did, at nearly every turn.

Conservatives’ favorite example of Bush abandoning conservative principles is the Dept. of Homeland Security, the biggest expansion of government since the Stamp Act, blah, blah, blah. Of course, they fail to mention that Bush originally parroted the conservative view and opposed making the department a Cabinet-level position. But in the immediate aftermath of 9/11, that position was politically indefensible.

What destroyed conservatism is that it Just. Doesn’t. Work. Any governing philosophy that considers government a problem to be controlled rather than a force for improving people’s lives is designed to fail.

Blind adherence to ideology, no matter how often it’s proven wrong, is not a virtue. It’s stupidity.

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