Liddick: Economic amnesia
BOHICA, friends.One of the first questions I ask my history students is why we study the past. Inevitably, one of the answers I get comes to us courtesy of Spanish philosopher George Satayana’s “Those who cannot remember the past are condemned to repeat it.” To which I respond, “Then why do we so often find ourselves repeating past errors?” The obvious response is embarrassing, so I rarely hear it.One of the financial roots of the 1929 “Black Tuesday” economic collapse preceding the Great Depression was a melding of investment and consumer banking services, which led to exposure of more and more depositors’ funds to high-return, but high-risk ventures. There were no regulations preventing this, because many small-investor services were new creations, without much of a track record. When the house of cards collapsed, there was no firewall, and millions lost their life savings. One of the results was the Glass-Steagall Act, which separated these two types of financial services. In the mid-1970s, we had either a preview of coming attractions or a reprise of 1929 – or maybe, both. In question were the relatively new banking institutions known as credit unions – sometimes referred to as “savings and loans,” after their main functions: providing consumer credit and individual savings accounts. Initially regulated by both Federal and State governments, in 1980, through the Depository Institutions and Monetary Control Act – passed by a Democrat Congress, signed by a Democrat President – these institutions were mostly deregulated. This happened because they were regarded as minor players on the financial scene; no one seemed to notice that with deregulation, most S&Ls were given federal deposit protection, which created moral hazard. Many S&Ls moved aggressively into commercial lending and competed for depositors by offering higher and higher rates for CDs. In 1982, this process received formal approval in the Garn-St Germain Depository Institutions Act, passed by a Democrat Congress, signed by a Republican president. Of course it couldn’t last. When economic slowdown and panicked regulators slammed on the brakes, a slow-motion banking collapse began. More than 10 percent of all S&Ls went under, dragging the economies of California, Texas and several other states down with them. In the end, about 125 billion taxpayer dollars were spent on the cleanup, which lasted almost a decade.No one seemed to learn from that mini-meltdown. In 1999, the Depression-era Glass-Steagall law was repealed in a bipartisan effort. Of particular interest was Section 16, which prohibited “proprietary trading.” Although this repeal wasn’t directly responsible for the Great Recession, coupled with changes to mortgage banking regulations that pushed lenders to offer more financing opportunities to “nontraditional borrowers” and a pervasive sense that home values could only rise, well… We all know the destination of the road paved with good intentions. And let’s not forget that the two politicians rolling fastest down that road to weakened lending standards in service of providing large sums of money to those who wouldn’t have previously qualified for them were Democrats: Congressman Barney Frank of Massachusetts and Sen. Christopher Dodd of Connecticut.Now we are engaged in another bout of economic Alzheimer’s. For years, a Congressional group led by Colorado’s very own Senator Mark Udall has been working to lift federal limits on the amount credit unions can loan to business, in the teeth of past experience. They have an ally in the National Credit Union Administration, originally established as an industry regulator: the NCUA Chairwoman, Obama appointee Debbie Matz, just announced that more than one-third of the nation’s credit unions have been qualified by fiat as “low-income” lending institutions, meaning they can make commercial loans without limit. In what might be charitably termed “dj vu all over again…” this decision was justified on “compassionate” grounds, the usual playground of the Left. Almost half of the institutions affected by this ruling, which sidesteps Congress’ power to regulate commerce, are in states currently suffering from drought. Apparently, it was felt by someone, somewhere, that loosening lending requirements and oversight was the appropriate response to borrowers whose ability to pay has been adversely affected by the weather. Because we can’t penalize people who might not be able to pay back loans, can we? That just wouldn’t be fair… When the whole mess crashes again, expect the usual: opportunistic politicians exhorting the hoi polloi to seize the torches and pitchforks and punish “greedy bankers” or some other such misdirective bogeyman. A large number of people will buy in; historical amnesia is, was and will be, as endemic as it is convenient.And as wrong, and destructive.Summit County resident Morgan Liddick pens a Tuesday column. Email him at email@example.com.
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