The Mortgage Crisis is conservative ideology insanity greed played out to the end

The Savings and Loan crisis was a direct result of deregulating the Savings and Loan industry. The collapse of Enron (and Enron's rape of the California energy industry and energy consumers) can be traced directly back to the rewriting of SEC regulations by Wendy Graham (wife of Sen. Phil Graham) that excluded the operations of Enron from SEC regulation. These deregulations of financial industries were both triumphs of the conservative philosophy that government regulation handcuffed the productivity of the economy. The identical ideological flaw led to the Great Depression and Herbert Hoover's refusal to take any actions to clean up after it and to regulate the ability of banks to create money.

Now Bill Sher explains that the failure is the mortgage crisis, once again caused by failure to regulate a financial industry.

Greenspan received several direct warnings about the looming crisis, but did nothing to regulate irresponsible corporations:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

....

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

...

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

...

Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that “no bubble exists.” Mr. Greenspan predicted several times — incorrectly, it turned out — that housing declines would be local but almost certainly not nationwide.

The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks.

Virtually every federal bank regulator was loathe to impose speed limits on a booming industry.

It was not always this way. As John Atlas and Peter Dreier explain in The American Prospect this week, our government once practiced regulation. And it was good.

There was a time, not too long ago, when Washington did regulate banks. The Depression triggered the creation of government bank regulations and agencies ... After World War II, until the late 1970s, the system work[ed]. The savings-and-loan industry was highly regulated by the federal government, with a mission to take people's deposits and then provide loans for the sole purpose of helping people buy homes to live in. Washington insured those loans through the FDIC, provided mortgage discounts through FHA and the Veterans Administration, created a secondary mortgage market to guarantee a steady flow of capital, and required S&Ls to make predictable 30-year fixed loans. The result was a steady increase in homeownership and few foreclosures.

Those glory days became a distant memory once Ronald Reagan brought the conservative movement to town:

...by the early 1980s, the lending industry used its political clout to push back against government regulation. In 1980, Congress ... eliminated interest-rate caps and made sub-prime lending more feasible for lenders. The S&Ls balked at constraints on their ability to compete with conventional banks engaged in commercial lending. They got Congress -- Democrats and Republicans alike -- to change the rules, allowing S&Ls to begin a decade-long orgy of real estate speculation, mismanagement, and fraud...

...The deregulation of banking led to merger mania, with banks and S&Ls gobbling each other up and making loans to finance shopping malls, golf courses, office buildings, and condo projects that had no financial logic other than a quick-buck profit. When the dust settled in the late 1980s, hundreds of S&Ls and banks had gone under, billions of dollars of commercial loans were useless, and the federal government was left to bail out the depositors whose money the speculators had put at risk.

The stable neighborhood S&L soon became a thing of the past. Banks, insurance companies, credit card firms and other money-lenders were now part of a giant "financial services" industry, while Washington walked away from its responsibility to protect consumers with rules, regulations, and enforcement. Meanwhile, starting with Reagan, the federal government slashed funding for low-income housing, and allowed the FHA, once a key player helping working-class families purchase a home, to drift into irrelevancy.

Into this vacuum stepped banks, mortgage lenders, and scam artists, looking for ways to make big profits from consumers desperate for the American Dream of homeownership. They invented new "loan products" that put borrowers at risk. Thus was born the sub-prime market.

Bill also refers to recent articles that explain the problems of the mortgage crisis:

• Alan Greenspan on the mortgage crisis: "I didn't do it!" in Salon.com and
• Fed Shrugged as Subprime Crisis Spread in the New York Times.

The problem is that the conservatives object to government restrictions, yet without those restrictions, the very industries the conservatives work in collapse every so often. Major efforts that had to be implemented to bring America out of the Great Depression include creating the Securities and Exchange Commission, regulating the ability of banks to make loans without having the assets to survive if those loans go into default, and regulations that require that the financial statements of public companies receive independent audits.

The failure of Enron was, in part, the failure of the accounting industry to conduct truly independent audits. The failures of Enron, Worldcom, Tyco International and Peregrine Systems among others required the passage of the Sarbanes-Oxley Act of 2002. The dangers of accounting firms that were paid by major companies to both audit the company's financial statements and also provide consulting services were reported for years before any of the above companies went bankrupt. Not only were the above companies destroyed by deregulation, so was Arthur Anderson, one of the accounting industry's "Big Five firms until it's collapse as a result of the Enron debacle.

These are just a few samples of the damage done to the economy by conservative greed. And the conservatives are proud of their actions, as Rick Perlstein documented:

Federal regulators once held a press conference in 2003. To symbolize their commitment to cutting red tape for bankers, they held up gardening shears. The head of Bush's Office of Thrift Supervision, James Gilleran, did them one better. He brought a chainsaw.

As I indicated in the title to this article, the conservative greed of which they are so proud is also a from of insanity (attributed both to Benjamin Franklin and to Albert Einstein) "insanity is doing the same thing over and over and expecting different results."

The Mortgage Crisis is just the next example of the insanity of accepting the conservative idiocy of deregulation of so many forms of business in which the seller makes a larger profit by shaving on the quality of the product - auditing, banking and financial reporting are just some examples.

One final thought, though. Poorly done regulation can be very destructive to an industry, so that has to be considered also. Properly done regulation can actually make an industry grow. As it is, the life insurance industry would be much smaller than it is if the states did not guarantee through regulation that insurance companies had sufficient financial assets to pay off when required, that life insurance contracts are written so that customers can understand them, that the contracts are sufficiently standardized so that consumers can compare the differences between the offerings of different companies, and that insurance companies do not simply take a customer's money during his or her life and then refuse to pay off upon the death of the insured. Without the standardization and financial assurance provided by government regulation, there would be a lot less life insurance sold.