Ever since the financial markets first froze in mid-2007, nearly collapsed in Sept. 2008 and rode a roller coaster in 2009, a tidal wave of anger has washed out rational discourse on the topic. My friend Mindy quipped, “They want heads on pikes. They want to see blood.”
This so-called “populist” anger at banks and “Wall Street” has a familiar tone to it. Fat Cat Banker is a standard phrase. President Franklin Roosevelt blamed the bankers for the Great Depression, and any significant downturn since has rekindled the fires of main street fury, some of it well-deserved.
But I’m troubled by the willingness to apportion the greatest share of blame to banks and bankers. Neither the cause of nor the solution to the financial crisis still gripping the U.S. and the developed world can be understood with examining the role of government.
The U.S. government wants more people to own homes — “The Ownership Society” is one where more people have skin in the game, a vested interest in their domiciles that makes them more stable, more involved citizens. For many years, government has insisted that banks lend to people at the margins of financial capacity, a legacy of the shameful process of “redlining.” Redlining withdrew banks from lending in a given area, regardless of the potential creditworthiness of borrowers in that area. Add lending policies that were openly racist and you’ve got a problem that needed to be fixed.
The government, however, wasn’t content. It still wanted more people to get loans and buy things, because that’s how our economy has operated during the last 30 years. No consumer spending, no prosperity. Getting people to buy during a period when their incomes weren’t rising much if at all means they need to borrow — and what better way to borrow than to take advantage of soaring real estate values?
So the government creates programs to shift lending risk — Fannie Mae and Freddie Mac — so that banks could make loans and get repaid very early, even as they retain the servicing rights to the loans; you’re still writing the check to the bank, but your loan is no longer on the books. Fannie and Freddie then sell blocks of loans to investors, further removing the bank and the agencies from the risk. The investors love the stable returns and hedge their risk by buying insurance — credit default swaps or “derivatives” — to insulate their income stream from the original borrower’s ability to pay.
When the borrower hits hard times, what happens? Who is to blame when the interrelated instruments start to fall apart?
Some blame does go to the banks. They bought the securities and created the derivatives. Some blame goes to the government, for fostering a climate that led to a bubble in real estate and writing laws that led to a wild west risk environment. Some needs to go to borrowers who bought too much house with too much debt.
In today’s Wall Street Journal, a story about Treasury Secretary Tim Geithner’s political travails talks about a frame that makes him — a lifelong public servant — into an apologist for and a tool of Wall Street. The financial bailout of the banks was a horrible moment, he says, but it worked. It stabilized the financial system, prevented what could have been a disastrous run on the banks (that’s really what put us into the Great Depression” and it’s costing a fraction of the $700 billion budgeted for it. The banks are doing better financially, and they’re paying the money back to the Treasury with interest.
But we live in a “fact-irrelevant” society these days, and in Washington, few seem to care about making good government. The Congress — with its desire for public hangings, preferably of bankers — seems willing to abrogate contracts and violate its own laws in order to put heads on pikes, spinning. And they’re relying on half-truths, mis-characterizations, and crafted frames to do it.
Our public relations toolkit shouldn’t be used in this fashion. It’s dishonest.
Besides, why invest so much effort in revenge? Confucius said, “Before you embark on a journey of revenge, dig two graves.”
