Conservative Financial Follies

Wall Street’s binge is over; now come the migraines. Lehman Brothers, one of the largest investment banks in the world, just declared bankruptcy. Yesterday, Merrill Lynch agreed to sell itself at a fire-sale price to Bank of America. Last week, mortgage giants Fannie Mae and Freddie Mac were taken over by the Treasury Department, and the insurance giant American International Group is teetering on the verge of bankruptcy. Banks across the nation, holding billions in toxic loans, are in trouble. [Wall Street Journal [1]]

The debacle is the direct result of conservative misrule. To increase profits, finance companies sold subprime and nontraditional mortgages to millions of Americans who—the companies knew—could not afford to make the payments. The brokers didn’t care; before the mortgages could become a problem, they sold the loans to investment houses that repackaged them into exotic securities and marketed them around the world. Now the entire financial system is reeling since no one knows what the toxic loans are worth. These follies were made possible when:

• Banking deregulation allowed the growth of a totally unregulated shadow banking system that borrowed heavily while inventing exotic securities to hide the value of underlying assets.

• The Office of the Comptroller of the Currency, which could have halted the sale of the worst of these loans by designating them “unfair and deceptive practices,” refused to do so. [Center for Responsible Lending [2]]

• The Federal Reserve Board failed to regulate subprime and exotic mortgage loans, although it had the power to do so. [New York Times [3]]

• The U.S. Department of Housing and Urban Development allowed Fannie Mae and Freddie Mac to purchase large numbers of subprime loans. [Washington Post [4]]

The banks went on a binge; the cops on the street turned a blind eye. The bankers pocketed billions until the housing bubble burst.

Americans are now paying dearly for the conservative folly. Across the nation, home values have dropped 16 percent over 12 months, the largest one-year decline on record. [New York Times [5]] Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth. [Bloomberg [6]] Homeowners without mortgage problems find themselves surrounded by boarded-up foreclosed houses. And taxpayers will ultimately have to pay hundreds of billions for all the recent government banking bailouts. [U.S. News [7]]