How Our Government Failed Us
"The Big Short," Michael Lewis' latest nonfiction, describes a playground ruled by the titans of finance where the game played was more fanciful than real.
Operating in an esoteric domain that neither the Clinton-era nor the Bush-era SEC bothered to penetrate, bond traders in America's elite banks and investment firms built a gigantic house of cards - mountains of made-up derivative securities (neither registered nor traded on public markets) holding no real assets but based on piles of underlying subprime mortgages that, although designed to fail, were highly rated by overly eager, easily manipulated rating agencies.
It was the private sector on steroids, with government either cheering or standing aside.
Nothing stood in the way of this bizarre market machine. When the supply of unqualified borrowers started to run dry, the genius "market makers" of Wall Street simply -refueled the machine by creating securities "out of whole cloth" - "synthetic" instruments amounting to little than opposing bets.
As a result, when the house of cards began to crumble, the losses in America's financial and credit markets turned out to be far greater than just what had been invested in subprime loans. In short, not only did the original junk fail, but the fake junk based on it also failed.
While greedy, unethical lenders stoked by greedy, unethical Wall Street traders took the lead role in bringing our financial system to the precipice, they had complicit actors:
- First, there was the U.S. Congress that, for decades, pushed home ownership but, either explicitly or implicitly, failed to stem certain out-of-control practices.
- Second, there was the Securities and Exchange Commission, either asleep at the switch or driven into inaction by the prevailing deregulatory climate.
- Third, there was the Federal Reserve, where Alan Greenspan, the libertarian disciple of Ayn Rand, presided. Much heralded during the earlier dot-com bubble, Greenspan purposely looked the other way when major financial institutions (during the housing bubble) took on unprecedented levels of risk, altering their culture and principal method of making money. Only now does Greenspan acknowledge that his abiding belief in self-correcting private markets was misguided.
In sum, American financial institutions were brought to their knees by a series of high-risk, incestuous private dealings that, admittedly, went largely unchecked by government action.
Putting blame aside, when the crisis finally came, it was big government - and big government alone - that had the capability of lending a helping hand, not to save a badly behaving financial industry but to rescue the broader commercial system on which all Americans depend.
Remarkably, the ensuing aftermath has given rise to a chorus of critics, media gasbags and bands of ordinary citizens demanding that government be dramatically curtailed, or scaled back in some bare-bones fashion.
Similar views, of course, have been heard many times before - especially during the Reagan administration ("government is the problem") and the early years of the Clinton administration ("the era of 'Big Government' is over").
But neither Reagan nor Clinton was successful in downsizing the federal government - and no future president or Congress will be either, as long as we have a big, highly complicated country facing big and inescapable challenges both domestically and globally.
If your argument is that government is too big, don't just say it, tell me what specific functions, services, policies and programs should be totally eliminated - not just what should be trimmed or adjusted.
And, more pointedly, if you uniformly oppose all government assistance to the private sector, can one assume that you would have convincingly let the biggest insurance company, the biggest national banks, all of the leading Wall Street investment houses, Fannie Mae and Freddie Mac, and two of our three auto makers to have all failed, simultaneously - regardless of the ripple effects?
In the end, it's not about big government or Draconian cuts in government. Rather, it's about smart, necessary and responsible government - a government large enough to protect its citizens and, when necessary, to take on big private institutions. In a sense, we need big, responsible government as never before.
Yes, government failed us in allowing risky practices to go unchecked for so long. This can and should be corrected by smart, properly tailored legislation and new regulation. It will not be corrected by just having the government get out of the way.
History (long-term and most recent) clearly teaches that the best way to preserve and promote our venerable capitalistic system is to regulate it in a way that also enhances the public interest.
Carl R. Ramey, a former Washington communications attorney, lives in Pinehurst. Contact him at ckramey@ nc.rr.com.
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