“Hair of the dog” solution to financial crisis would be disaster

By Leon Logan

The editorial “Government doesn’t belong in banks” blames the financial crisis on the supposed government pressure to make home loans to unqualified buyers. That is referring to The Community Reinvestment Act passed in 1977. It took 31 years for it to affect the economy?

The act applied to depository banks only – which accounted for only a small part of the bad loans. The Bush administration used federal powers to block state level efforts to impose some oversight on sub-prime lending. The Bush administration was very anti regulation. Fannie Mae and Freddie Mac are also being blamed by conservatives for the crisis. In actuality they accounted for only a small portion of the bad loans due close scrutiny.

The primary cause of our financial crisis was risks taken by institutions that have never been regulated. Deeply involved in the crisis is also the “innovative” unregulated financial instruments. Warren Buffet referred to them as “instruments of financial mass destruction.” The lack of laws or of enforcement in some areas of the financial system was a big enabler of this crisis.

The final paragraph says “It’s bad enough the government has bailed out the banks rather than letting them take their lumps in the market place for unwise decisions. Nationalizing banks would be disastrous”.

The purpose of the “bailout” was to save the financial system of the world, not to save a particular bank or banks. The unregulated market place gave us this crisis, letting the market take care of it would be a “hair of the dog” solution and a worldwide disaster.

The majority of mainstream economists, of all political stripes, say doing nothing is not an option.

This crisis calls for practical solutions, commonly called pragmatic, not ideology.

Leon Logan
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