Wall Street Welfare

In one last feeble attempt to save his corruption-tattered legacy, Sen. Chris Dodd is trying to sell his fix for Wall Street. It’s too bad that this ‘fix’ is more like providing cocaine to an addict than a solution to the real systematic problem contaminating our economy.

What makes this situation truly ironic is that the Bailout King himself is claiming that this new financial reform bill will get rid of bailouts all together. Does he think the American people are dumb or just oblivious?

Dodd’s bill not only fails to get rid of bailouts, it makes them a permanent entitlement.

Big Wall Street banks will now be able to tap into a slush fund anytime they fall on their faces. The fund will include $50 billion of taxpayer money and then will be maintained with taxes from larger banks. It sounds eerily similar to the way unemployment benefits function for individuals.

This Wall Street welfare does nothing to change the institutions and culture that got us into this recession in the first place. In fact, it emulates the same type of thinking that led to the housing crisis.

The intended purpose of this bill is to prevent another recession and subsequent bailout, but Washington has never examined what got us into the current recession in the first place. If you’re going to try to fix a problem, you ought to understand the problem’s source.

Rep. Barney Frank, Chris Dodd, and Obama’s economic crew either blame free markets or underregulation for the housing crisis. Being typical statists, they’ve never bothered to look at the role the government was playing in the housing market. Bastardizing capitalism is much more fun.

As economist Thomas Sowell explains in his book, The Housing Boom and Bust, the housing crisis and subsequent recession originated from nominally compassionate government programs. The earliest was Jimmy Carter’s Community Reinvestment Act which made it the goal of the government to subside the housing market so more people could afford homes.

In 1998, Bill Clinton looked to build on this program and charged Fannie Mae and Freddie Mac—government-backed mortgage investment banks—to take on even more sub-prime home loans. Fannie and Freddie effectively started to buy and subsidize loans made to low-income borrowers.

Fannie and Freddie, not being actual lending firms, simply made it their policy to buy ultra-risky loans from lending firms like Countrywide and Bank of America. The lendors had no reason to insure the competence of their borrowers, all they did was make the loans and pass the risk on to Fannie and Freddie.

The Federal Reserve also played a role in the housing crisis. After 9/11, the Fed dropped their funds rate (the interest rate banks can loan to each other and from the Fed), lenders were able to gain access to a ton of cash. When the banks were infused with the extra cash, they made even more sub-prime loans.

Carrying around 70% of all home loans, Fannie and Freddie would sell these loans in bulk to investment banks like Goldman Sachs and Citigroup where they would be made into derivatives and sold to investors. When speculation enters the equation, bubbles get magnified.

Investors saw these federally backed home loans as a sure money-makers. Since aggregate home prices hadn’t fallen for dozens of years, it seemed that there was no way it could fail.

What these speculators learned to realize is that this market was built on borrowers who were in no position to pay off their loans. Government organizations pushed Wall Street to be “compassionate” by putting low-income folks into homes they couldn’t afford.

It turned out to be anything but compassionate when their houses foreclosed. The government put these people in a position to fail. When foreclosures start occurring in 2004, it began the unraveling of this intertwined market. The risky investments built up into an epic bursting bubble.

If we want to avert another crisis like this one, we’ve got to address the government incentives that caused the malinvestment in our economy. We need to reform the Fed, Fannie Mae, and Freddie Mac. Instead, the Dodd bill gives Wall Street an even bigger reason to engage in the government-insured risky business that got us into this mess.

Washington can prevent future crises, not by creating perfect regulation, but by getting out of the way. D.C. politicians must stop their failed attempts to control the market. This latest edition of Wall Street welfare is just another example of big government’s inherent stupidity.