Where to Point the Blame for the Financial Crisis

Obama and the Democrats seem intent on pinning the current financial crisis on the Bush Administration and the Republicans. In some ways, the Democrats are right in that the GOP and Bush share in the blame for the crisis, but when pointing fingers they should notice that 3 are point right back at themselves. How appropriate, because it is government and ineffective regulation that is truly the culprit in this financial dilemma.

There is no lack of regulation in the financial industry, just pick up a copy of the 1933 Act or 1934 Securities Act and you'll see, better yet pick up a recent addition of the tax code and you'll be lost in the monstrosity of government regulation.

Back in 2003, Bush appointee John Snow pushed for greater oversight of Freddie Mac and Fannie May, the two giant GSE's that are in the middle of the mess. Schumer opposed Snow, as did Chris Dodd:

"I am very hopeful,'' said Dodd, the committee's second- highest-ranking Democrat. Lawmakers "realize it's important to get the GSEs off the radar screen and outside the cross hairs and get them back to doing what they should be doing, and that is providing affordable housing.'' GSEs are government-sponsored enterprise such as Fannie Mae and Freddie Mac.

So who have been the biggest recipients of Freddie Mac and Fannie Mae political fundraising? Democrats. The details are shocking: Dodd, Obama, and John Kerry are by far the largest recipients of donations. Dodd got $165,000, Obama $126,000, and Kerry $111,000. Of course, Republicans were also pigs at the trough, but not like the Dems. Obama also has key Fannie Mae people on his campaign staff.

Democrats, like Sen. Chuck-you Schumer wanted to expand Fannie and Freddie even as other tried to reign them in:

The direction he has set since taking over Washington-based Fannie Mae in December resembles a tactical retreat. Mudd, who holds a master's degree in public administration from Harvard University, has cut the company's dividend in half, frozen hiring, slashed the lobbying budget by one third, and presided over a 6 percent decline in its $852 billion mortgage holdings.

That slow-growth strategy has drawn rebukes from some in Congress, including Senator Charles Schumer, a New York Democrat, who backed a growth strategy they say created more affordable housing by expanding the pool of mortgage funds. These critics say the company is caving in under pressure from Republicans, some of whom cite warnings that the debt levels at Fannie Mae and Freddie Mac may be too large, posing risks for the economy.

So why is the media not pointing this out? Why am I, a blogger, able to find this with a few easy Google searches? If a little investigation is done, it is quite obvious that the Democrats and Republicans share the blame for the crisis, but much of the problem can be pinpointed on government regulation and GSE's which distorted the true risk of the market. Capitalism works fantastically when it is allowed to operate freely within boundaries that protect consumers while fostering intelligent risk taking and entrepreneurialism.

Investors Business Daily also points the finger at government being at the center of the problem:

"[I]t was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

In the movie Wall Street, Gordon Gecko points out that greed has benefits and points out some poignant market realities, "America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!"

He also describes government and inefficiency with perfection, "The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated."

He's exactly right. If institutions fail, it is creative destruction. The sky will not fall, but people may lose money and jobs. The danger is that if government continues to bail out companies that fail, further distortion of the market in regards to risk will result that will lead to a true catastrophe in the future. Let justice be done or the heavens fall, and don't bail out losers.

The answer to this crisis is not government or central planning or regulation, the answer is responsibility. The answer is innovation, true risk and value being transparent to investors and participants, and opportunity to succeed without government restricting growth.