Thoughts on the Politics of the Financial Crisis

by McQ | October 12, 2008 4:33 pm

You know, after the dot.com bust of a few years ago, you’d think we’d have learned our lessons in general. For a while there, conventional wisdom proclaimed that the old economic laws and those laws which had provided success to investors who followed them just didn’t apply anymore. P/E ratios? Bah, old school. Companies which actually produce something other than vaporware? Bah, you buy on potential, not on concrete accomplishment.

And we all know the result of that debacle. Of course, compared to the one we’re facing now, that was child’s play.

Victor Davis Hanson[1] takes a look at the current crisis and assesses it this way:

There is plenty of blame to go around. Greedy Wall Street speculators took mega-bonuses even when they knew their leveraged companies were tottering — and someone else would pick up the tab. Crooked or stupid politicians allowed Fannie Mae and Freddie Mac to squander billions, as they raked in campaign donations and crowed about their politically correct support for millions of shaky — and now mostly defaulting — buyers.

The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.

Indeed there is plenty of blame to go around. And there is a mentality that has taken hold of a certain part of the American public that eschews the old ethic of delayed gratification, opting instead for for an entitlement mentality which encourages an attitude that each of us deserves whatever we can get however we can manage it.

Delayed gratification, earning your way and saving are obsolete ideas in this brave new world. That and again ignoring the basic rules of economics in this blind-leading-the-greedy attempt at political utopia.

I say political utopia for a reason – the basis for all of this, when all is said and done, lays at the feet of politicians and political institutions. The utopia they sought was as old as politics. Trade favors for votes. The favor was homeownership for those who couldn’t afford it or qualify for it in return for their political support.

And, in their arrogance, they figured that they could build a firewall (Fannie Mae and Freddie Mac) which would insulate them from economic law. But just as gravity keeps on pulling apples from trees and bouncing them off the ground, the laws of economics inexorably had their way.

We can argue about all the greed and stupidity on Wall Street (and there’s plenty) and the same things among the American public (again, plenty), but in the case of both Wall Street and the public, what we saw was a reaction to a situation. The situation was created -key word- by politicians. As most of us who’ve lived a few years can tell you, any situation created which allows exploitation without the perception of risk is -surprise, surprise- going to be exploited.

Of course the risk was there the entire time, it was just well hidden by economically clueless (or criminally complicit) politicians who were sure they could cover all bets. And the politicians who were benefiting from the arrangement chose to ignore the looming signs of trouble. But the laws of economics, just like they did in the dot.com bubble, had their way.

And here we are.

I’ve said in other posts that the one thing I have yet to see addressed is the actual role government played in setting up this crisis. I’ve heard a few mentions here and there of those who are responsible, but for the most part, I’ve seen a concerted attempt by those very people who have been named to blame shift all of this on “the market”. It wasn’t the market. Another favorite target of these politicians is to blame it on “Wall Street”, or “predatory lenders”, or “speculators”. All of those are a result of the policy for which they were responsible. Without the government policy in question, there was no situation to exploit. And without a situation to exploit, there’s not enough bad paper, bad mortgages, bad decisions on Wall Street or Main Street to cause this meltdown.

Heads should roll, and not just on Wall Street or Main Street. I’m talking about the heads of politicians. A lot of them. But, the cynic in me says that’s not very likely to happen. Barney Frank and Chris Dodd, the two obvious candidates for losing their political heads, are likely this time next year to be sitting in exactly the same place doing precisely the same things they are now – blaming others. And that’s pretty pathetic. Neither are likely to be the focus of any investigations, neither are likely to be the target of an ethics inquiry and most importantly, the policy that drove the meltdown is unlikely to be really examined or changed (and, of course, they always have Bush to blame).

Why? Because the party that will most likely be in power is the party most responsible for its existence. And it has paid them too handsomely over the years to kill it off.

So, if in fact they’re driven to examine the root cause of this mess next year, don’t expect anything more that cosmetic changes and bland assurances that “everything is fixed” and that “this will never happen again”. Of course keep in mind, by that time, government will be so deep into the financial markets of this country that it will be difficult to determine where the “market” begins and the government’s tentacles end.

In the meantime, let’s all give serious thought to turning over another huge sector of our economy to them as well – health care. They couldn’t screw that up as badly as they have this, could they?

One last thought. Actually it’s Hanson who brings it up. It’s about those old fashioned “laws” that seem to have worked so well in the past. The ones that people seem keen on dumping because, well, they just don’t feed the needs of the instant gratification crowd:

Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is.

That little paragraph, if followed, can save you not only a lot of grief, but a lot of money as well. For most, it is common sense. For some, however, it will come as a revelation. For all it provides some rules of the road that will weather most political storms cause by the arrogant, inept and stupid who call themselves members of Congress and who repeatedly attempt to suspend the laws of economics for party and personal political gain.

[Crossposted at QandO[2]]