Monday, March 24, 2008


Barney Frank was in town last week to talk about regulation. And, whatever else your opinion of his politics are, on this issue he’s right on the mark.

In Wall Street, Gordon Geco said greed, is good. Well, from what we’ve seen in the economy over the past year, greed is decidedly not good. Greed, along with deregulation has led to this mess.

For years, the mortgage industry in general, along with investment bankers, has lobbied to be allowed to, basically, act like commercial banks. But they’ve fought being regulated like commercial banks, saying “the market” could regulate itself. Well, that obviously has not been the case. The mortgage industry, with extremely lax regulation over the last number of years, has basically thrown underwriting standards out the window. And the large investment banking firms bought up these very risky mortgages, because they could package them and sell them to investors at very high profits. The problem is, they were building a house of cards, that was destined to fall. And they were allowed to do this, due to lack of regulation, and the greed that such lack of regulation leads to amongst, not all, but far too many.

The proof of that pudding is the fact that large commercial banks, which have remained relatively highly regulated over the last number of years, didn’t make or back the extremely risky loans like the mortgage industry/ investment banks did because, basically, they weren’t allowed to. And, while everyone has been hurt by the economic downturn, commercial banks, unlike so many mortgage companies and investment banks, remain relatively strong today as a result.

Who’s to blame? Lots of people, not the least of which being the mortgage industry and the investment banks who, basically, threw prudent lending practice/”risky” investment practice out the window. However, ultimately, Congress and the Bush administration is to blame for allowing this unregulated lending/investment fiasco to develop. And its not as if they didn’t have evidence illustrating the dangers of such deregulation. The

S & L crises of the late 1980’s and early 1990’s was, as we learned, greatly induced by lack of regulation.

What’s the bottom line here? Its twofold – 1st: Congress is only now finally realizing that the lending/investment industry as a whole has to be regulated. Capitalism works, but only to a point. Certainly, in this part of the economy, the markets decidedly do not self regulate. And without regulation, we get economic downturns like we have today, where everyone suffers. 2nd: While, it is imperative that Congress re-regulate, and soon, relative to this economic downturn, it, unfortunately, is going to be very much a case of closing the barn door after the horse has left.