Comment on Belmont Club "Memory lane"

The Republicans have to offer some straight talk. Here is a script proposal.

This financial panic was not largely caused by deregulation. A few good regulations, such as the “uptick rule” and other controls to prevent abusive short selling should be restored. This panic was caused by bad regulations, beginning with the Community Reinvestment Act that forced banks to offer loans to unqualified buyers and then sell those sub-prime loans to other institutions. Once the buyers of those homes began to default on their mortgages it created a cascade of bad debt that has swept through the entire system. Banks that did not participate in these risky practices were threatened by Congress members and the very agencies, Fannie Mae and Freddie Mac that had been created to keep the industry operating smoothly and safely. Senior officers of those agencies collected millions of dollars due to what may have been fraud while concealing the growing insolvency. Therefore any program to restore liquidity to the economy, which is essential so that businesses can hire and ship and qualified buyers can buy the homes that are now more reasonably priced, must include the repeal of those laws and regulations that created this disaster.

In addition no business or agency should be considered “To big to fail.” That would open the public treasury to blackmail by every large and inefficient business competing against clever but smaller new firms. It would stifle the entrepreneurship that renews America. Any large firm facing such a crisis should have an opportunity under the bankruptcy laws to reorganize as smaller units with a better chance of surviving. If a firm is a threat to the overall safety of the nation due to its size and possible weakness then the government might need a procedure to order the firm divided, as we have done in other cases with Anti-trust law. As part of the recovery from this crisis we will propose that Fannie Mae and Freddie Mac be divided into 12 smaller units. Each will be tied to operate within a Federal Reserve district and operate under the eye of the local Federal Reserve Bank to promote the health of the economy in its assigned region.

This is not a sign of a fundamental weakness in the American economy. We are facing a largely self inflicted wound caused by bad politics and greed. We can fix this and permit the American people to continue to create new industries and build new wealth. Other real concerns that can affect our future prosperity, such as dependence on foreign oil, will have to be dealt with. We will work on that. We will also lay out a policy to expand and restore the global reach and flexibility of our Armed Forces. That will include a significant expansion of industrial activity that will stimulate the economy. For now be assured that this crisis, while serious, can be surmounted.

Sep 29, 2008 - 9:50 pm