The crisis in the U.S. mortgage market can be blamed on a variety of factors and the dissection of this stinking corpse has only just begun. Like the meltdown at Enron only a few years ago, the current mess is rooted in a variety of seemingly complicated decisions by greed-motivated businesses (in this case mortgage lenders) and their political backers in Washington.
This week, Business Week reports on the Office of the Comptroller of the Currency and its role in the current financial meltdown. “One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.”
At its root, what the Office of the Comptroller of the Currency did was sit on its hands. Relying on the legal doctrine of “Preemption,” the Comptroller argued that banking regulation was in the exclusive purview of the Federal government – regulation of the industry at the state and local levels would create a mire of conflicting regulation and would ultimately harm the mortgage industry.
This is an appropriate theory but it failed in practice. This hands-off policy of the industry combined with aggressive lobbying by the industry to deregulate its practices and a paradigm shift in lending practices laid the foundation for disaster.
Deregulation or, more appropriately termed, “regulatory neglect” was enabled by leaders at all levels of government in Washington. As was noted on Yahoo News today, “Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.”
While it is popular in convervative circles to demonize efforts to rein in business corruption as “liberal extremism” or “government regulation,” it ultimately comes down to throwing off the shackles in unfettered greed.
I urge you to take a look at these two articles:
“Mortgage firm arranged stealth campaign” Pete Yost, Associated Press for Yahoo News
“They Warned Us About the Mortgage Crisis” by Robert Berner and Brian Grow, BusinessWeek
What do you think? I am interested in hearing from readers about this question of regulatory neglect. Would the existing regulatory framework in place have taken care of this problem?
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