The greatest economic calamity of contemporary time occurred in 2008. While there were complex issues behind the economic meltdown, main culprit was an overvalued housing market that became a bubble. When housing valuations began to fall, the bubble popped, the catalyst for the overall economic meltdown.
The housing bubble did not occur by chance or natural economic activity. The fuel that fed this fire included:
- Irresponsible Federal Reserve monetary policy that left interest rates too low for too long. This not only helped promote cheaper mortgages, but also cajoled investors into investing in mortgage-backed securities, seeking yield in very products.
- Inappropriate lending practices were forced on commercial banks by the government in its pursuit of a social agenda, which included the Community Reinvestment Act of 1977. Through Fannie Mae and Freddie Mac, the government forced banks to lower lending standards so that individuals who could not afford mortgages received them.
- The government also has an in incestuous relationship with banks. For example, it created legislation enabling commercial banks to become involved with very risky financial products that risked systemic damage to the economy; i.e. repeal of the Glass-Steagall Act late in the Clinton administration, In addition, the Commodity Futures Modernization Act of 2000 allowed banks to become involved in the ultra-high-risk derivatives market.
Most economists agree that actions of the Fed, government legislation and banker greed were responsible for creating the housing bubble and subsequent banking crisis. Significant lip-service was offered by politicians for corrective action, including the massive Dodd-Frank legislation of 2010. However, this legislation is causing more problems in the banking system. The crisis was caused by banks supposedly being too big to fail. With Dodd-Frank, the largest banks have gotten bigger.
The 2008 economic meltdown brought on a liquidity crisis that threatened the world’s banking system. Central banks and governments used massive interventions and stimulative policies to offset the crisis. These policies may initially have been successful in staving calamity, but have since lost effectiveness. Eight years later while central bank interest rates remain near zero, economic growth is anemic. This prolonged economic stagnation i a major reason behind growing social disorder in many countries.
Given the scope of the economic damage, it is telling that not one banker has been indicted or imprisoned for unethical behavior. In addition, bank executives who were enriched during the bubble years have not had to make any restitution. The incestuous relationship between bankers, governments and central banks make such punishment unlikely.
To appease the masses, politicians have created the illusion of corrective action. This includes the above-mentioned Dodd-Frank Act. In addition, the Justice Department creates an illusion of bank retribution by levying massive fines on large bank. According to an Andy Koenig’s Wall Street Journal op-ed titled Look Who’s Getting That Bank Settlement Cash, these payments include:
- $5.1 billion settlement with Goldman Sachs
- $3.2 billion settlement with Morgan Stanley
- $7 billion with Citigroup
- $13 billion with J.P. Morgan Chase
- $16.65 billion Bank of America
While the settlements might make it seem like the greed and poor business practices have been addressed, reality is different. First, the banks involved were bailed out by the US government through the TARP program. One could make the argument that the penalties were actually inflicted on the US taxpayers who funded TARP. In addition, the penalties on the banks affected earnings and shareholders long after the perpetrators of the actions received large bonuses, none of which was returned.
Koenig points to another troubling aspect of the government’s bank “retribution” program. None of the collected funds have gone to those damaged by the bank’s behavior. Instead, the Justice Department forces the banks to give the funds to nonprofit organizations drawn from a federal government approved list. This includes some such as Catholic Charities that are typically nonpolitical. However, it also includes La Raza, the National Urban League, and the National Community Reinvestment Coalition who are known to have Progressive political agendas that include voter registration programs, community organizing and significant lobbying efforts. This is but a political shakedown, an abuse of power that does not offer redress to or appropriate punishment to those responsible for the problems.
Those on the Left of the political aisle seem satisfied with the federal government’s role in distributing fines from banks, as a majority back causes they agree with. However, this is a slippery slope that one day will benefit the opposite political causes.
Conservatives have also been acquiescent to the government’s movement of money from banks to political and social causes. This demonstrates that the political elites are more concerned with consolidating power in Washington than following the rule of law or the Constitution.
The more power collected in Washington the greater will be the abuse of power.