Friday, October 10, 2008

Deregulation: A Primer

This thesis was originally intended to instruct a child when the honorable senator, John McCain decided to suspend his presidential campaign to save the economy. It is here presented in its original outline.

Let us examine together the great financial crisis which so suddenly thrust itself upon an unwitting public last week.

1. I guess it's not a crisis until the banks themselves are forced to show their books. Never mind the American people facing foreclosure, these loans aren't worth what they should be to trade on the open market. The truth is that nobody who was holding a traditional mortgage would really be out very much money on a defaulted property, even if it had lost 20% of its value. On a typically amortized loan, the lion's share of the interest is paid upfront. Even if a loan goes into default, after two to five years of payments, no lender is going to come out upside-down. That's just what they want you to think. The loan is sold as an investment. The interest that has already been paid has already been pocketed.

2. The only historical precedent we have to this scandal unless somebody in the Hoover administration is willing to come forward is the savings and loan scandal of the late 1980's. See the "Keating Five" via Wikipedia Deregulation allowed fund managers for savings and loans companies to invest in extremely risky junk bonds. When the losses came flooding, the government made savings accounts whole through the Federal Deposit Insurance Corporation. At least that was a fairly straightforward scam, using existing laws in conjunction with deregulation.

3. As you can imagine, much like pool safety rules and regulations, regulation of industry is supposed to guard and protect the consumer against fraud, abuse and certain eventualities or outcomes that can prove very negative to the consumer. They are usually written by the good guys. They are not needless Lilliputian constraints place upon business as conservatives would have you believe. These are the laws that protect you and me from harm.

4. Deregulation is popular with conservatives, because it usually means businesses can get away with murder. Witness the deregulation of electricity in California. Good regulation could have easily prevented this crisis.

5. All of a sudden Dick and George thought up this bailout plan as the magic bullet as soon as they got the news? I don't think so. It's all part of a plan. They thought it up a long time ago. There's a reason it doesn't include helping out American families with ARM's. They want to give the money to their buddies on Wall Street. Bush resisted calls to limit the salaries, bonuses and golden parachutes of executives of these very companies that are supposed to be bailed out. That's just the way they do business.

6. I know, you're thinking. Money doesn't just disappear. What happened to all the money that was lost in this debacle? Who got to strain it through their baileen before it disappeared? Near as I can tell, they really don't know who exactly will benefit when these scams go down. I guess as long as it's a businessman and the consumer takes the fall, then it's allright. It must have been pretty chaotic this time around, but they know who will make up the difference. That's right. You and me, the American taxpayer.

7. McCain doesn't know what, if anything, that can be done. And indeed, has a track record of going along with this kind of stuff.

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