Though several watershed events of deregulation and a prolonged flood of Federal Reserve Bank liquidity plainly created the conditions for the real estate bubble, some would like to divert the attention away from the profiteers and onto ‘mainstreet’.
From the New York Times article Agency’s ’04 Rule Let Banks Pile Up New Debt:
Decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control.. They [TGU: the major Investment Banks] wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
Via The Big Picture, Barry Ritholtz has a series of articles on the Community Reinvestment Act (CRA), including a panel interview from Bill Moyers’ Journal on the notion from neo-conservative circles that the CRA is to blame for the mortgage crisis by encouraging three decades of government intervention pressuring banks to write sub-prime loans for low income borrowers. The CRA argument has been lambasted widely. But as Moyers’ guest, Georgetown Prof. Emma Colman Jordan points out, the argument is compelling as a sound bite because it distills down to the tried and true method of divide and conquer, i.e., the wedge issue. And the issue here is class and race. But even a casual review of the facts reveals the 1977 CRA argument as a straw man. An examination of inflation-adjusted housing prices, expressed in terms of consumer purchasing power (from Real Dow), shows an unmistakable deviation from reality for home prices, dating to around 2000, roughly coinciding with de-regulation, the tech bubble, and of course, the prime culprit, a lax Federal Reserve monetary policy:
But the class/race issue is a potent argument to make to a public with a large and widening income gap and faced with a long and deep recession. As evidenced by the last two Presidential elections, these wedge issues can be relied upon to fracture the electorate along the same old party lines.
Now all this is obvious enough but as will be seen by a reading of any of the articles cited above, arguments both for and against are always framed in terms of the same old partisan political narratives, Republicans versus Democrats, liberals vs. conservatives. The tried and true wedge issues faithfully perform their real purpose, to keep us divided.
All but the most indoctrinated among us will admit that lobbyists and consultants, bribes and corruption run rampant in Washington on both sides of the aisle. But too often, as the red-herring of the CPA argument makes clear, we allow ourselves to fall victim to the straw man of false dichotomy. Through corporate controlled media, carefully crafted choices are presented to us, almost exclusively in the partisan model, and too often we fail to escape from Plato’s Cave. The wedge issue is, in fact, a disingenuous product, paid for and delivered to us through the overwhelming force of the media.
Consultants have come to agreement, for example, on how to select issues for campaign discussion, who to target in campaign messages, and when to mobilize voters. Initial evidence suggests that this consensus cannot be explained by rational calculation or changes in the balance of power between candidates and political parties. Instead, a model based on the institutionalization of a set of accepted practices by a professional community seems to provide the best explanation.
We live in a disinformation society. The powers that would be exploit the tendency for Americans to become divided by their inclination towards a progressive or conservative constitution. That the opposition to the bailout, for the moment, has transcended these partisan lines has not been overlooked by these powerful interests. We will begin to hear more arguments from the media pundits, along the lines of the CRA flap, that will attempt to force this populist opposition to descend into partisan bickering, we must avoid this outcome at all costs.
As we move beyond the bailouts and the era of George Bush, we as a nation will face a series of existential challenges. We will also have to answer some very tough questions. How did the deregulation of the financial industry take place, and who will be held accountable? Do we have the political will to dismantle the few financials that are left standing, to prevent the ‘too big to fail’ moral hazard? And how do we go about the monumental task of reigning in the executive branch, after a series of disastrous assaults upon the Constitution?
The financial crisis and the bailout has brought the true power struggle, momentarily, very close to the surface. But we cannot succeed in restoring the Republic until we can bridge the partisan divide. As citizens, we must recognize this false dichotomy for what it is, an engineered argument, with the sole purpose of keeping the status quo in power by pitting us against ourselves. If we are not vigilant, re-regulation will be presided over by the very institutions that colluded with government to dismantle them in the first place. For as the following video chillingly reminds us, corporations aren’t interested in deregulation per se, just regulation in their favor.
Further Reading:
Did liberals cause the sub-prime crisis?
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October 9th, 2008 at 1:55 am