Tuesday, June 16, 2009

Business week follow up to Schumpater society

So I realize I am very slow to follow up to that Kauffmann.org video I posted the transcript of a while ago, but not long after I posted that I found that I am going to be a father sometime near the end of November so I have been making my home ready for a new addition. That said I saw a link in my facebook stream that made me think about that video and some synthesis on the actions and the road to recovery that The Obama administration has laid out and the perceived inaction by congress on some of his agendas. I believe that the Business week author and my friend on Facebook take the inaction on several pieces of rhetoric out of the Obama administration to be the status quo guarding its position, and to some extent they may be right, but at the same time they guarding their interests they may be guarding the public's as well. Regulatory structures create a burden on every industry that they affect, and this industry actually already had in place all the statutes in place to authorize the bodies needed to oversee them to take corrective measure that could have averted the bulk of the economic collapse. The trouble is that Congress (as pointed out by Carl Schramm in the Kauffmann video) actively tried to set the bench marks that for what was acceptable market activity. These benchmarks where somewhat politically motivated and inherently flawed, that prevented the respective delegate regulatory agencies unable to effectively police their area of regulation. Bad market benchmarks coupled with artificially low interest rates that where intended to "stimulate" the economy coupled with high overall market activity was an effective cover for the truly fraudulent mortgages (that where knowingly created on an hourly basis according to someone I know that worked in the mortgage industry) would have been easier to detect. Had the legitimate transactions taken on so many attributes that would have appeared risky or fraudulent absent the Congressional mandates for low income lending the worst of the worst mortgages that have reshaped the lending and financial institutions of this country would never have existed.

I know that most people wanted sweeping change, but I think that if you look at rushed knee-jerk legislation like the Patriot act and Sarbanes-Oxley we would be well advised to enact simpler legislation that ensured that Congress had less direct influence on daily policy in regulatory bodies, when you remove politics from regulation the bodies are more likely to stick to their mandates, and establish regulation that makes sense.

For the question as to whether the recovery is being flubbed I think that it is pretty clear that the stimulus packages in place that are making the credit markets more liquid again are only serving to extend the debt society that we live in. The Federal reserve lending system at its heart appears to allow fabrication of wealth via the partial reserve lending system. If banks had to have and transfer all the money needed to fulfill a loan, they would be much more careful about those loans they did give. I am not saying that this would necessarily be a simple or practical overnight fix, just that I bet if customers knew that their money could be lost (particularly in the face of defaults) they would exercise a lot more interest in what banks where doing with their money. They would likely go back to buying Government bonds rather than trusting their savings with banks, and it would make the revenue stream off of mortgages seem quite a bit more valuable than it currently is perceived to be.

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