The White House tackles financial regulation

This entry is based on the following article: http://www.dispatchpolitics.com/live/content/national_world/stories/2009/06/17/arate.html?adsec=politics&sid=101.

I recognize that Rep. John Boehner (R - Ohio) is the minority leader, and it's his job to present an opposition to the proposals by the majority party. Just for a moment, however, let's step back and look at the history of finance in this country, since the Carter years.

When stagflation hit at the advent of Ford's presidency, industry in the United States started down a novel economic path: the path of inequity. Until the '70's, American workers enjoyed real wages that reflected productivity. When productivity went up, real wages went up. This caused some mild inflation in the country, but that was acceptable because wages rose slightly above inflation. But Friedman, and those that followed his monetary economic policy, argued that inflation would soon kill the growth of the American industrial sector, and moved to have the Federal Reserve take a more active role in shaping the direction of the economy. Thus, we have problem number one: the interference of the Federal Reserve into the economic affairs of the United States.

When Carter came into power, he had to deal with a stagnating economy. By this time, unions had become partners to the corporations; employees had less power relative to their employers, and the trend was not going to change. It's no surprise, then, that we see real wages stagnate and hold, while productivity continued to rise. This created an equity gap, where the workers made the same as they always did, but the managers began to make more. So, we have problem number two: the rising equity gap between workers and managers.

Carter lost to Reagan, and Reagan declared war on regulation. He cut taxes enormously, but failed to realize that the Fed had planned to tackle the inflation problem by raising interest rates to record levels. With high interest rates, there were few people who could borrow, and that was a problem. But the banks had a plan, and lobbied for it. If they were allowed to offer a wide-range of "financial products" (a euphemism for lending contracts or schemes), then they would be able to offer loans below prime (sub-prime) or other kinds of lending instruments that would both protect the bank against risk, and provide loans to the average person. To do this, though, they would need to be rid of the patchwork of state regulations that prevented such loans. So, we get problem number three: the DIDMCA, which effectively removed national banks from the control of the myriad states through the Supremacy Clause -- control would now come solely from the federal level.

Then, it was off to the races. Congress approved of other measures intended to increase the level of high-principle lending, including tax deductions for mortgage interest (which even Reagan could not stop), sub-prime lending instruments, adjustible-rate mortgages, and so forth. Congress also loosened up regulatory enforcement by cutting funding to those efforts. Even after the Savings & Loan scandal of the late 80's, Congress still did not learn its lesson. So, we get problem number four: the introduction of non-traditional mortgage instruments, and the failure of Congress to learn from its mistakes.

And, of course, that was not the end of things. The Gramm-Bliley-Leach Act of 1998 repealed one of the most important prohibitions of the 1933 Glass-Steagall Act -- the prohibition of commercial and investment banks merging together. This created a number of "conflicts of interests" between the agents and actors in each sector. Commercial banks, who lent the money, started to pitch their clients -- ordinary folks and businesses -- to invest in the banks they were affiliated with; the investment wings, in turn, made the commercial wings look like geniuses. Various disclosures that investment banks had to make to the SEC and other regulatory bodies were no longer necessary because they were now commercial banks, and vice versa. Shading blurred what was going on, to the point where the average person only knew that they were making more "money" by investing. Thus, the beginning of the investing binge, the selling out of pensions for 401(k)s, and the fly-by-night trading outfits. So, we have problem number five: an entanglement of entities which should have competing interests and loyalties, but which may shield themselves from scrutiny based on the lack of regulation.

And we haven't even talked about how the lack of oversight makes it simple to commit the sort of fraud that can crush the savings of the average, working American.

The people of Ohio have agreed to let their leaders set interest rates on loaning instruments. In November of 2008, the voters of Ohio, by referendum, ratified the Ohio Short-Term Loan Act, which capped the ability of payday lenders to charge more than 28% interest per annum. Ohio suffers from one of the highest foreclosure rates in the nation (1.797% of households, which is just above half of Nevada's mind-boggling 3.376%), which is at least partially due to the proliferation of alternative "financial products" in the lending market. Despite these facts, Rep. Boehner appears to oppose the ability for government to set reasonable rates for loans, or to regulate the kinds of "financial products" that are available to the average American.

I don't think Rep. Boehner is representing the interests of Ohioans very well at the moment. Being wary of excessive intrusion into the finance industry may be warranted, but certain things need to change, namely the five problems I've outlined above.