Lehman Brothers went under, Merrill Lynch got bought out by Bank of America, the Freddie and Fannie takeovers, stock market plummets… what went wrong?
I’ll be the first to admit I’m not the most knowledgeable person when it comes to economics, but even I can see what went wrong here: reduced regulation in the financial sector and lack of oversight on the federal level. Ever since Ronald Reagan, republicans have believed that government is always the problem, regulation is bad, and the free market cannot function correctly with government oversight. The problem with this theory is that the world is not that black and white. Regulations came about to protect the consumer and the companies themselves. Its true that when Reagan took office the regulations had gone too far, taxes were prohibitively high for business, and that it was crippling the economy. That was one extreme. The extreme in the other direction is what we have today: virtually no regulation, oversight, or accountability. Both are disastrous as we are seeing now. A middle ground is needed, and although it can be argued that the stripping of regulations started in the latter years of Clinton’s administration, the 90’s is as good of an example that I can think of to a middle ground.
Now, tying this into today’s campaign, John McCain and the republican party are running on a platform of lower taxes, less regulation, and reform (of what is yet to be determinded). The problem is this proposal isn’t any different from what we have seen in the past eight years of republican rule, and indeed, the last 30 years of republican philosophy. The worse the economy gets, the harder it is going to be for them to sell this philosophy again. Steven Denlinger has a theory that the Bush administration is trying to prop up the economy with bailouts in order to keep it from hitting bottom before November 4th. Its an interesting theory and I certainly wouldn’t put it past the republicans to do something like that.
My problem with the bailouts is that it sets an awful precedent. Bailouts are anti-free market, a concept republicans and many democrats champion. If the free market were at work here, these companies would all fold or be bought out by other companies because of the poor decisions they made. Instead, their poor decisions get the heads of these companies billions in the short term and then get a handout when the whole thing implodes. Now we hear about Detroit automakers inquiring about federal loans or a bailout so they can refurbish their factories for making hybrids and more fuel efficient vehicles. Well, maybe if they didn’t shove SUVs, Hummers, and giant trucks down our throats for decades they could have done that years ago. Instead they are probably going to get a cash injection to do this at some point. If you are for a 100% free market, you should be troubled by all of this news. This is not my view though.
Now tying this back into the whole idea of regulation, there is good regulation and bad regulation. Republican philosophy is to oppose all regulations though. Things like raising the fuel economy standards could have prevented the auto industry from being where it is today. Go to another country and you won’t see people riding around in SUVs because its literally illegal to sell them there. If we told the banks that once they gave out a loan they had to keep it for themselves instead of selling it off to some other bank and forgetting about it, they might have been a little more careful in who they gave loans to. I mean this is common sense folks. You don’t have to be a economic wizard to understand this. Regulations were there for a reason: to prevent companies from taking such huge risks, but also to protect the consumers.
There needs to be a middle ground if we want to prevent another fiscal catastrophe like this again.
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