“A Vicious Cycle of Their Own Making”

This morning NJ governor Jon Corzine, who’s been driving the ship of state at full speed down the turnpike of financial doom, was on CNBC or Bloomberg (I forget which) asking for more government regulation of the financial markets.


Government intervention and interference is exactly what got us here.

Bailouts will only preserve the mentality that no matter how badly you screw up, there won’t be any consequences. For as long as that mentality is propped up with governmental handout after handout, no one is going to seriously demand that people are held responsible for their actions.

What people?
a. corporate officers and board member are fired, and sued.
b. auditors lose their licenses.
c. stockholders and investors realize that they are responsible for their own finances and demand accountabily and full disclosure from the investments they hold.
d. consumers realize that they take risks every time they interact with a financial institution and can lose their money.

Yes. That’s what I mean by “people”.

You don’t go $613 billion in the red by mere coincidence.

The Heritage Foundation has a great post, A Vicious Cycle of Their Own Making on the housing/mortgage problems.

But Fannie and Freddie pushed back hard, turning to friends on the left for protection. Former Walter Mondale and Barack Obama campaign adviser James Johnson led a fierce lobbying campaign to fight reform of Freddie and Fannie. Clinton administration OMB director Franklin Raines told investors when he was Fannie Mae CEO in 1999: “We manage our political risk with the same intensity that we manage our credit and interest rate risks.” Fannie and Freddie’s lobbying power over the left continues to be strong to this day. According to the Center for Responsive Politics, the top three recipients of campaign donations from Freddie and Fannie’s PACs and employees are all Democrats. From 1989 through today, Sen. Chris Dodd received $165,400, Barack Obama $126,349, and John Kerry $111,000. The Washington Post concludes: “Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them.”

Go to their post and follow the links.

Fear of market reaction is what drives the call for more government bailouts.

Andy McCarthy who knows a heck of a lot about prosecuting financial malfeasance, has this to say:

America is holding its collective breath today. The Bush administration made the gutsy decision late last Friday to say enough is enough: There will be no Bear Stearns-style rescue for Lehman Brothers, which is teetering on the brink of failure. This time, a venerable brokerage firm, a pillar of the financial sector for well over a century, will be allowed to fail.

The decision is certain to send the markets reeling until a new, more transparent equilibrium is found. Already reverberations are rocking Wall Street. Lehman appears headed for bankruptcy. Still viable but ailing, Merrill Lynch, the domino otherwise likely to fall next, is selling itself to Bank of America for $44 billion. As the Wall Street Journal editors aptly observed this morning, even as Wall Street is being “remade,” we are “getting a Category 5 test of our financial levees.”

If fiscal sanity is to be restored, Treasury’s decision was urgently necessary. For the economy’s long-term health, buyers and sellers, borrowers and lenders, transacting parties have to understand that they are responsible to their own behavior.

And now it’s time to strike another blow for sanity through transparency: Put Fannie Mae and Freddie Mac on the government’s books.

Fannie and Freddie, of course, are the mortgage giants seized by the government a week ago. How much is that going to cost American taxpayers? Well the political class, which created the disaster that is Fan and Fred and seems desperate to preserve them, has decided that small detail needn’t concern us.

As Democrats continue to champion these “quasi-government” entitles, the Bush administration quietly announced on Friday (as all eyes were on Lehman) that though the government is now running the mortgage giants — and thus all of us are officially on the hook for their liabilities — it sees no need to incorporate their balance sheets and the business operations in the federal budget.

Does that sound familiar? It should. When managers who don’t happen to run the United States government decide to park their losses and liabilities off the books, we call that corporate fraud. When they did it at Enron (in a scam involving a pittance of what we’re talking about here), the execs went to jail for a long time. Even their accounting firm was prosecuted, causing countless employees who had nothing to do with the scheme to be put out of work.

Fannie and Freddie are a cautionary tale against the Left’s idée fix of private-public “partnerships.” Their sordid history of book-cooking and slush-fund earnings-management allowed top executives — in the main, political cronies of Democrat power-brokers — to qualify for millions in bonuses even as the behemoths were rotting from within.

What could court disaster more than a system in which profits are tucked in the pockets of an anointed few (who then, naturally, donate goodly chunks of same to their political benefactors) while risks and losses are borne by American taxpayers? Doing more of it, that’s what.

In terms of national debt, here’s the numbers:

The potential liabilities of Fannie Mae and Freddie Mac total about $5 trillion. Putting that in perspective (as the Wall Street Journal did pre-bailout), until a week ago, the entire United States national debt equaled $9.5 trillion. We’ve now increased it by more than 50 percent.

Any of this blog’s readers who still hold on to the fantasy that “the government” will take care of you would be well advised to understand that the money comes from you.

And it’s high time Washington stopped sending lifelines to these failures. Washington should just hand them a shroud.

UPDATE, Tuesday Sept. 16:

The C.S.O. is an accountant by trade. Accountants know that the Law of Conservation of Money is as strict as the Law of Conservation of Mass / Energy. If a dollar is “going,” it’s going to somewhere. If a dollar is coming, it’s coming from somewhere. When government steps into the market and “guarantees” a loan or “bails out” a failing corporation, it’s doing so with money raised in one of three ways: taxation, debt, or inflation. When that money flows into a failing business concern, it’s going into the hands of businessmen who’ve already demonstrated that they don’t know how to manage it wisely. Clearly, neither the “coming from” nor the “going to” is something to be celebrated. Why, then, are so many persons jubilant, or at least relieved?

Why, indeed.


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4 Responses to ““A Vicious Cycle of Their Own Making””

  1. A Pretty Mess » Blog Archive » What’s next for the U.S. economy? Dow down 504 points, Lehman Bros. files for bankruptcy, McCain and Obama speak up Says:

    […] is captivated too: In “A Vicious Cycle of Their Own Making,” Fausta urges the end of “government intervention and interference,” blogging […]

  2. Wall Street Woes, Media Meltdown & More - UPDATED | The Anchoress Says:

    […] creative law-writing that sounds like something but is actually NOTHING. Fausta is serving up some straight up “snap out of it” on the importance of an economic lesson being […]

  3. Jerry in Detroit Says:

    Bobby Jindal’s ethics legislation had had an immediate and salutory effect on Louisiana politics. I’d propose extending it to a national level.

  4. Black & White | Constant Conservative Says:

    […] more regulation (translation “goverment is the answer”) to fix all of this instead of getting people to own up to their actions, then I’ll know that Occam’s Razor has not entirely lost its edge. No Comments, […]