Wednesday, October 01, 2008

Where Next?

While one should not underestimate the ability of the current Congress to manage to do nothing, even in the face of what appears to be a looming and serious economic crisis, it would seem safe to assume that they will do something to bail out America's financial services sector bythe end of the week. To fail to do so runs the risk of this Congress becoming historically remembered as the legislative equivalent of the Buchanon and Hoover administrations. Be that as it may, one might wish to ask, "What next?"

Once Congress throws a lot of money at remedying the immediate problem, what should be done in response to what can only be acknowledged as a systemic failure?

American political leaders are more adroit at casting blame than at finding correct solutions, and one fears that this situation will prove no different. Nonetheless, in order to solve a problem, one must identify it, and the following culprits have been fingered by this or that interest group:

  • Consumers overweighted with debt taking on bad mortgages in order to maximize the amount of house they could buy.
  • Banks offering risky subprime loans and various mortgage products to those consumers.
  • Securities firms bundling bad loans into products that resulted in an amplified risk of failure.
  • A Republican emphasis on deregulation that allowed much of this to go on.
  • A Democratic willingness to give free reign to GSE's run by their friends and to promote banking practices to encourage home ownership among populations that could not afford it.

How about: all of the above? These choices are not mutually exclusive.

Conservatives should remember that conservatism is not the absence of all regulation, any more than liberalism requires that everything become state run. Certainly, conservatives tend to defer to free markets, to understand that eliminating risk also eliminates innovation and growth, and to recognize that regulation tends to have unexpected and unwanted consequences. Still, conservatives understand that roadways require speed limits, and the nation's financial system requires at least some regulatory structure sufficient to prevent its leaders from committing economic suicide. They have shown no ability to avoid that on their own.

It will be interesting to see if anything constructive comes out in the aftermath of this.

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