Deregulation, Ain't It Great?

by Wayne Spencer - September 19, 2008

Remember Ronald Reagan and his "religious" devotion to deregulation. The airlines were among the first industries that were deregulated. How many airlines have gone broke since then? Our airlines today are in a state of chaos. Yes, we used to pay a little more for a ticket to fly, but we had ample room to be comfortable and were actually served a meal even on a relatively short flight. Back then pilots were paid salaries that were the envy of everyone. Today, pilots salaries are pitifully low and with little security. You would have thought that the deregulation of the airline industry would have taught us all a lesson.

Remember the deregulation of the energy industry? Remember companies like Enron were buying and selling electricity and natural gas? They were holding back supply to make artificial price spikes. The government agencies who should have been regulating them just sat by and watched. You would have thought that the deregulation of the energy industry would have taught us all a lesson.

Then a part of the banking industry was deregulated. What had previously been commodity and equity brokers were allowed to go into traditional commercial banking and regulated banks were allowed to go into the equity trading business. Now we have a mixture of regulated banks and unregulated banks. This led inevitably to the bundling of mortgages and selling them on the equity market. The banks and mortgage companies that originated the mortgages insured the mortgages through insurance companies and sold the mortgages to investment brokers.

There was a problem. Many of the mortgages had adjustable rates. When the housing market declined and the interest rates increased, home buyers were caught in a bind. They could not refinance their mortgages since in many cases their property was worth less than what they owed and they could not find buyers for the homes. Since the mortgages were insured, the banks and mortgage companies found it more profitable to foreclose on the properties and collect the insurance on the defaulted mortgage than to work with the buyers. If these mortgages were not insured it is more than likely that the banks and mortgage companies would have worked with the home owners by rolling back the interest rates or changing the terms of the contract. There was a Democratic proposal in Congress last year to mandate that the banks and mortgage companies roll back the interest rates and work with home owners to reduce the numbers of foreclosures. The administration said that it would veto the bill if passed. In a compromise this year Congress was able to pass legislation that the President would sign to help home owners. It provided about $250 million for relief. Not much help, but a lot of fanfare.

Now as a result of the real estate mortgage crisis, the investors holding these bundled mortgages are in trouble. Not only that, but the largest insurance company that insured these mortgages is in trouble. Do you think that we have learned our lesson about deregulation? I seriously doubt it. How interesting is it that the banks that are not in deep trouble are the regulated ones.

Unfortunately, the regulated banks such as Bank of America are now being encouraged to take on the debt and responsibilities of the unregulated brokerage houses. What is this going to do to the stability of the banking industry.

The Fed and the Treasury to the rescue. As of yesterday, the U.S. Treasury has added more than a trillion dollars of exposure to the debt in its bailout of Bears Stern, the nationalization of Fannie Mae and Freddie Mac, the buy out of AIG and the support of the money market accounts.

It does seem strange that when the mortgage crisis started a simple straight forward law, if it had been passed and signed, would have saved the banking industry and would have saved the U.S. Treasury over a trillion dollars.

Remember when the mortgage crisis started, we were told that the Federal Government could not interfere with the mortgage industry since it would be sending a signal to the home owners that they would not be held accountable for their reckless behavior and speculation. Now, it seems that these same officials are not worried about helping out the wealthy financiers when they are in trouble. Where is the cry now for accountability? In the case of AIG, the Government has actually taken ownership of the company.

Apparently socialism is just fine for helping the rich but not so fine when it comes to the poor and middle class. Our cities are crumbling, our people are going without healthcare, our infrastructure is in decay but there is no money available. The administration and conservatives are saying we shouldn't want socialized medicine, our infrastructure should be sold to private enterprise and even our Social Security System should be privatized. Imagine what a mess we could be in if everything was privatized?

On second thought, maybe privatization is the route to socialism. Just think, if the private sector made the mess that they have of all these other things, I guess the Government would have to take them over to save them from bankruptcy.

One thing has been made perfectly clear this month, after spending a trillion plus dollars helping the richest people on earth together with the expenditure of $10 billion per month on an ill advised invasion and occupation of Iraq, there is plenty of money available for Social Security increases, solving the healthcare problems, rebuilding decaying cities and rebuilding our infrastructure. The politicians can no longer tell us that the money is not available.

Possibly, had we invested more in our Social Security System, solved our healthcare problem, rebuilt our cities and rebuilt our infrastructure we would not have had to spend the money on bailouts that do nothing to improve our country and its inhabitants. As my mechanic says, pay me now or pay me later.

Trickle down economics is to economics as intelligent design is to science. Economics has been a science and not an art since the great depression. Keynesian economic theory is to economics as Newtonian physics is to physics. Keynes did not invent the laws of macroeconomics, he discovered the mathematical equations to describe them just as Newton did not invent the law of gravity, he discovered the mathematically rules that describe it.

To keep a capitalistic economy healthy, the trick is to keep purchasing power in the hands of the masses and to keep a balance between the rich and poor. If you have ever played Monopoly then you know that sooner or later everyone goes bankrupt except the single winner. Is that the way we want our actual economy to work? I don't think so. Pull out your old Monopoly game and play the game again, except this time change the rules a bit. Try taxing the profits on each pay out. If the taxes are just right the game can go on forever. It's called redistribution of wealth. The conservatives seem to abhor this idea and some refer to it as class warfare. But the fact remains that without some kind of redistribution of wealth from the upper income levels to the lower income levels there will still be a redistribution of wealth, but from the bottom to the top. This redistribution of wealth from the bottom to the top is not sustainable in the real economy any more than it is in the game of Monopoly. The bailouts that we have seen recently are an unsustainable acceleration of redistribution from the bottom to the top and in the long run will only make matters worse. A bailout of the home owners would make a lot more sense from a purely macroeconomics standpoint and would in the long run a more sustainable economy.

The choice is not between a well regulated capitalist system or an unregulated one, but as FDR had clearly seen in the 1930's a choice between a well regulated capitalist system or a well regulated socialist system. FDR actually saved the capitalist system. Of course there is always the alternative of chaos.

What do you think?

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Copyright © 2008 by Wayne Spencer - This article may be freely distributed with this copyright notice attached.