Fed Up

Alan Greenspan had an interesting change of heart today. He endorsed the Consumer Financial Protection Agency as an overseer of banks and lenders.

For Alan Greenspan, lapdog to Ayn Rand, perhaps the only person in America not to recognize the possibility of human greed in the financial markets, to come out for a federal body overseeing the Masters of the Universe, the same kind of consumer protections he opposed while chairing the Fed, is quite a turnaround indeed. But then Greenspan told us that he was rethinking his theories after the biggest financial collapse since the Depression.

Greenspan: I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms…

Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Greenspan: Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In particular, Greenspan said that the Fed's current responsibilities are quite enough for the body to manage without the added layer of consumer protection. He might have gone a bit further and mentioned that, when faced with a choice between monetary policy and consumer protection, the Fed will always choose the former. They don't exist for the mere consumer. You can see this in the performance of Alan Greenspan's Federal Reserve during the housing bubble.

The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending [...]

The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.

But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

Binyamin Appelbaum's story is well worth reading. If the Federal Reserve were a rank-and-file employee, they would have been fired long ago.

I don't know if Greenspan is trying to atone for past sins or actually learn from past experience. But when you have Greenspan and the World Bank in agreement with the likes of Elizabeth Warren, that Fed powers have grown too strong and a separate entity needs to be charged with protecting people who enter into financial arrangements, there clearly is a growing consensus here.

Postscript: Barney Frank's interview with Ezra Klein has some excellent insights. Frank feels we must limit securitization - the idea that if you spread enough risk around you could sell literally anything. He wants higher capital requirements and less leverage for the big banks as well.

No, It's NOT Just About The South, Sen. Voinovich

Amazing what comes out of the mouths of retiring Republican Senators once they no longer have to depend on the base for their political survival:

Too many conservative senators like Jim DeMint (R-S.C.) and Tom Coburn (R-Okla.) are to blame for the GOP's downfall, one of their retiring Republican colleagues complained Monday.

"We got too many Jim DeMints and Tom Coburns," Sen. George Voinovich (R-Ohio) told the Columbus Dispatch. "It's the southerners."

Voinovich, a native Clevelander who retires after the 2010 election, continued after the southern elements of the GOP.

"They get on TV and go 'errrr, errrrr,'" he said. "People hear them and say, 'These people, they're southerners. The party's being taken over by southerners. What they hell they got to do with Ohio?'"

Markos sez that this is largely factual, that the interests of the South do not match the interests of the country and a political party overcome by regional elements will inevitably have problems. But I think Voinovich is being a bit too clever here. What has he really stood up to his party about over the last several years? He temporarily blocked John Bolton's confirmation. That's about all I can think of.

Indeed, if you look at Jim DeMint's solution for health care, it doesn't have a regional bias, but reflects the standard conservative talking point about the free market.

DeMint offered the usual line on health care: free markets will solve all. And he pushed especially hard for letting insurance companies sell across state lines, which he claimed would make insurance affordable for everyone.

This is a teachable moment; I think it helps get at the heart of what’s wrong with free-market approaches [...]

The reason we have restrictions on interstate sales of health insurance is that a number of states regulate insurers. In particular, some states have a form of community rating, which basically says that insurers can’t deny you coverage or charge extremely high premiums if you have a preexisting condition. And community rating will be unsustainable if individuals can buy insurance from out of state; insurance companies in states that don’t have community rating will cherry-pick the healthy, good risk people, leaving the community rating states with only the highest-cost people.

Now, you might say that’s fine: if you’re a bad risk, you don’t get insurance. But politicians never say that in public, because most voters feel that their fellow citizens shouldn’t be denied health care. So the way this is always presented is that effective competition will make insurance so cheap that everyone can afford it [...]

So when you hear people like DeMint — or conservative economists — preach the wonders of a market-based health care system, bear in mind that this is what it would look like: an America in which nobody who has ever had a major health problem, or had a minor health problem that for some reason bothers the insurance company, can get coverage. Believing that it would turn out otherwise is the triumph of ideology over experience.

DeMint believes unfettered markets can cure health care, when they cannot. But would that be at odds with the approach of the Business Roundtable, or the Chamber of Commerce or any of a dozen or more think tanks?

Southerners may have a different style than a George Voinovich, but they are all selling the same policies. Maybe the Southern rump does it with a little more flair and a lot more religion. But they fundamentally have a conservative set of mantras, and they don't deviate. Sen. Voinovich wants to deflect blame for the failure of these policies, but we shouldn't let him.

Magnificent Disaster

As Emperor Paulson dithers and shuffles papers pretending to look busy implementing the bailout, the lobbyists are lining up for their piece of the bailout cash, and apparently, nobody is keeping tabs on them:

In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric M. Thorson, the Treasury Department's inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

Considering that the Treasury Secretary can hold press conferences pledging to do the exact opposite of what he initially asked for in the bill, considering that his department can change the tax code to provide a huge windfall to banks, telling me there's "no oversight" seems a bit self-evident.

In fact, the bailout plan itself appears to be working just as the Bush Administration hoped - as a "free-fraud zone" for moneyed interests to get paid off during an economic collapse. They even staffed it with one of the same guys that handed out bricks of cash to contractors in Iraq, before deciding that was too on the nose.

Under cover of an emergency, Treasury is rapidly turning into an economic Green Zone, overrun with private companies collecting lucrative contracts. Fittingly, one of the first to line up at the new trough was none other than the law firm of Bracewell & Giuliani — yes, that Giuliani. The firm's chairman, Patrick Oxford, could scarcely conceal his glee over the prospect of cashing in on the bailout. "This one," he told reporters, "is very, very big." At least four times bigger, in fact, than the post-9/11 homeland-security bubble, from which Giuliani and his various outfits have profited so extravagantly. Even bigger, potentially, than the price tag for the Iraq War itself.

See if any of this sounds familiar: As soon as the bailout was announced, it became clear that Treasury officials would hire outsiders to perform their jobs for them — at a profit. Private companies wanting to help manage the bailout were given just two days to apply for massive, multiyear contracts. Since it was such a mad rush — after all, the entire economy was about to implode — there was no time for an open bidding process. Nor was there time to draft rigorous rules to make sure that those applying don't have serious conflicts of interest. Instead, applicants were asked to disclose their conflicts and to explain — and this is not a joke — their "philosophy in fulfilling your duty to the Treasury and the U.S. taxpayer in light of your proprietary interests and those of other clients." In other words, an open invitation to bullshit about how much they love their country and how they can be trusted to regulate themselves.

I guess there's one positive - at least Treasury is hiring!

Meanwhile, Bush is headed to a meeting of world leaders to tell them they'd better not get any funny ideas about fixing his mess.

Nov. 13 (Bloomberg) -- President George W. Bush today will urge leaders of the world's biggest industrial and developing economies not to abandon principles of free-market capitalism as they seek an escape from the international financial crisis, calling it the "best system'' for delivering growth.

In a speech in New York before weekend talks among leaders from the Group of 20 nations, Bush will say policy makers "should fix the problems we have rather than dismantle a system that has improved the lives of hundreds of millions of people around the world,'' according to a statement released by the White House [...]

For all his defense of markets, Bush this year extended the reach of government by backing bailouts of American International Group Inc., Bear Stearns Cos., Fannie Mae and Freddie Mac. His administration is also implementing a $700 billion financial rescue program which U.S. Treasury Secretary Henry Paulson yesterday shifted toward relieving pressure on consumer credit, scrapping an effort to buy devalued mortgage assets.

Of course, corporate welfare and socialism for the rich IS the "free-market system" that Bush is defending. It's the only type of economy he has ever known.