Thursday, March 27, 2008


Though I have yet to read his speech in its entirety, Senator Obama's statement, "we need to regulate institutions for what they do, not what they are," distills, I believe, a sentiment underlying my previous post. I take issue with banks or corporations not because they are banks or corporations, but instead for their abuses of a system that is woefully unregulated. Even where regulation does exist, it is un- or under-enforced.

What Glass-Steagall did was not single out banks for punishment or admonishment, but lay out rules for the proper functioning of the financial sector. Commercial banks taking deposits could not serve as investment banks or underwrite insurance. Why? Speculation by unscrupulous bankers and banks had led to widespread lack of confidence in the financial sector. Despite the heated rhetoric of the congressional debate, bankers were not distrusted because of their identity per se, but because of their behavior. Thus, the law set out not to punish them for their past acts, but prevent them from occurring in the future. It set up safeguards to limit what bankers could and could not do for their clients and investors. It provided insurance for investors through the Federal Deposit Insurance Corporation. The ultimate goal was not retribution or even the reimbursement of the funds lost through speculation, but the formation and structuring of a sound banking system.

The government has a similar responsibility to homeowners caught in the mortgage crisis. Not every one of them should be offered a lifeline, but some, if not most, should. The speculators and the gamblers, who sought to get rich quick through "flipping houses," must be separated from the middle-, lower middle-, and working-class individuals and families who wanted to become, or wanted to continue to be, homeowners. The latter should have access to subsidized home loans and greater housing security, such as that proposed by Senators Obama and Dodd.

1 comment:

ebl2009 said...

The problem I have with your argument is that it's still unclear to me why individual homeowners should be cleared of responsibility for being fiscally derelict whereas financiers should not. In effect, both made the same assumption - they assumed that because house prices would continue rising, equity would continue to accrue and the initial dangerous loans would become less risky overtime, certainly not blow up as they have.

The argument that homeowners are less intelligent/perceptive than financiers and hence should be absolved from their actions seems dubious when compared against the standard to which you hold the financiers. It is highly likely that financiers also did not know what the effects of their bundling/selling of CMBS would be in a negative sense. Yes, one could make the argument that probabilistically, the risk existed that the properties would be foreclosed upon, but homeowners also have a probably calculus as to whether they'll be able to pay off their mortgage in the future. In this way, the two actors do not seem appreciable different to me.

It just goes to the point that absolving on the basis of ignorance is a dangerous approach (esp. when it appears to be applied as a double standard).