Despite Media 'Mythmaking,' Capitalism Didn't Fail
Speaker of the House Nancy Pelosi blasted free market capitalism (and the GOP) in front of the entire nation on Sept. 29 as the debate raged over a potential $700 billion bailout.
âThey claim to be free market advocates when itâs really an anything goes mentality. No regulation, no supervision, no discipline,â Pelosi said, according to CBS âEvening Newsâ that night.
But did deregulation and âunfettered capitalismâ really lead to the financial crisis gripping Wall Street? The answer is yes, according to politicians on both sides of the aisle and the news media. Theyâre wrong, according to many economists including
The networks have also attacked free markets and blamed a lack of regulation for the current Wall Street problems â but havenât explored regulations that actually created them.
Former and current anchors and reporters including Sam Donaldson, Chris Cuomo, Carl Quintanilla and others bashed the free market and deregulation in September. In contrast, the three broadcast networks didnât talk about the Community Reinvestment Act of 1977 during the month, even though economists argue that CRA generated many of todayâs financial problems.
CNBCâs Jim Cramer admitted his predisposition toward regulation on ABCâs âNightlineâ Sept. 17.
âI wanted a more proactive government, one thatâs less ideological, so to speak. One that is more regulatory. These guys were not inclined to do that. They actually â and I still hear them do it. They believe in the market,â Cramer said.
The host of âMad Moneyâ has been all over the mainstream media lately. Heâs been interviewed by ABC, NBC and CNBC about the financial situation. Cramer was even on Martha Stewartâs show to repair chairs on Oct. 1.
Both senators vying for the presidency have blamed deregulation and Wall Street âgreedâ for the monetary mess. According to Sen. Barack Obama, D-Ill., under the Bush administration, âweâve had policies that have shredded consumer protections that have loosened oversight and regulation.â
Sen. John McCainâs, R-Ariz., rhetoric wasnât much different. McCain denounced âmismanagement and greed [that] became the operating standards while regulators were asleep at the switchâ and lashed out at Securities and Exchange Commission chairman Christopher Cox on Sept. 18.
The New York Times reported that Cox, a regulator, was arguing for more regulation, according to a Sept. 27 Times article titled âS.E.C. Concedes Oversight Flaws Fueled Collapse.â An MSNBC subhead summarized the argument: âCrisis sparks anger over executive salaries, lax regulation.â
Despite the anti-free market tone of many network stories about the financial crisis there are still many defenders of capitalism. Economists and other experts argued on Bloomberg.com, Forbes.com and in the editorial pages of The Wall Street Journal and Investorâs Business Daily (IBD) that the economic turmoil facing the
What âfoolhardy government policyâ was Williams referring to? The CRA, which âintimidated lendersâ into offering credit to more people and specifically âdiscourages them from restricting their credit services to low-risk markets, a practice sometimes called redlining.â
Thomas J. DiLorenzo of the Von Mises Institute called CRA âextortionâ on banks in an April 30 article. That story explained that CRA was created during the Carter administration and in order to comply with the regulation mortgage securitization âexploded during the 1990s as a result of government regulation.â Securitization bundling was an attempt to diversify risks from loans made to high-risk borrowers.
CRA regulation was also strengthened under President Bill Clinton in the 1990s, according to Terry Jones of IBD. His article called the subprime mortgage crisis âinevitableâ after
Other regulations including Sarbanes-Oxley, which enforced mark-to-market accounting (fair value accounting) by imposing criminal penalties, also had a hand in this subprime crisis. Mainstream media have all but ignored the governmentâs role in creating the problem in favor of repeating campaign rhetoric. Network reporters didnât mention Sarbanes-Oxley in September at all â although a couple interviewees made the connection and suggested âthrowing out Sarbanes-Oxley.â
More Regulation, the only Media Option
ABCâs âWorld News with Charles Gibsonâ found an economist to promote more regulation on Sept. 16. David Wrightâs story included Tom Gallagher, a political economist with Wall Street research firm ISI Group, who said âEverybodyâs for tighter regulation here.â Although Gallagher cautioned that regulation could make it harder for some people to get credit.
CNNâs Lisa Sylvester mentioned CRA on Sept. 29 âLou Dobbs Tonight.â But she mischaracterized as âderegulationâ the 1990s changes that actually strengthened CRA rules.
The constant assault on deregulation meant there simply was only one position to take â in favor of âre-regulation.â âEveryone is now for re-regulation,â Sam Donaldson said on ABCâs âThis Weekâ Sept. 21. Donaldson claimed that Reaganâs deregulation had to be âcleanedâ up and implied that deregulation from 1999 and 2000 caused todayâs debacle.
âWe deregulated beginning â99 and 2000, the banking industry, Phil Gramm and others, I think that Obama ad is correct. He was one of the prime movers. Now weâre gonna have to clean that up at great expense,â Donaldson said.
CBS âFace the Nationâ host Bob Schieffer even let Rep. Barney Frank, D-Mass., go unchallenged on Sept. 21.
Frank complained about the âirresponsible decisionsâ of the private sector and inadequate regulation. Frank chairs the Congressional committee responsible for oversight of Fannie Mae and Freddie Mac â the two government-sponsored enterprises that were recently taken over by the
Frank, who was involved romantically with a Fannie Mae executive for 10 years while serving on the committee, defended Fannie and Freddie against accusations of mismanagement and worked to block efforts by the Bush administration to increase regulations of the organizations.
According to IBD, CRA turned banks into âpliable, easy targetsâ of groups like liberal advocacy group ACORN (Association of Community Organizations for Reform Now) and âno bank CEO wanted to be mau-maued as an enemy of the poor.â
In the 1990s,
âThatâs how it began. Later, in the Clinton, era, Fannie Mae and Freddie Mac got involved â buying up bad loans from banks, and securitizing them for sale on world markets. The seeds of the subprime meltdown were planted,â IBD said. All on Frankâs watch.
Government Intervention â the Heart of the Crisis
As the crisis in the financial sector took hold, the networks were quick to ask what or whom was to blame. The answer was predictable: âgreed,â free markets and President Bushâs deregulatory policies.
Brian Williams wondered âhow we got hereâ on Sept. 15 âNightly News.â The answer came from CNBCâs Carl Quintanilla: âSome call it payback for years of risky lending practices and weak regulation.â
ABCâs Chris Cuomo let borrowers off the hook, but accused the government of fiddling while Rome burned on Sept. 22 âGood Morning Americaâ segment about the possible Wall Street bailout. Cuomo criticized Wall Street bankers and scorned âgovernment watchdogs, including the Federal Reserve and Congress looking on.â
Asking how we got here was an essential question, but the networks only seemed to be looking for one type of answer. Instead of talking to a free market economist for another perspective, Cuomo included liberal Economic Policy Institute economist Clyde Prestowitz, who told viewers, âYou had totally unsupervised markets that married with new instruments that no one understood.â
As for the complicated financial instruments â thatâs exactly where Fannie Mae and Freddie Mac made their government-sponsored living. BMI advisor and
According to Wolfram, market economies are âfundamentally sound.â When there are âgyrationsâ you should look for the government cause for the problem. In this case, Wolfram explained, âGovernment started out doing this by creating Fannie Mae and Freddie Mac in the first place. They became government sponsored enterprises and what happened is they went out and set up this secondary mortgage market.â
Combined with a below inflation Federal funds interest rate, the government encouraged âexcess borrowingâ and âmalinvestment,â Wolfram said.
Another regulatory tumor that led to Wall Streetâs troubles was Sarbanes-Oxley, t government regulation enacted in 2002 as a reaction to the Enron, WorldCom and other accounting scandals.
According to a Forbes.com commentary from former Speaker of the House Newt Gingrich, Sarbanes-Oxley carried criminal liabilities that âhave driven accountants to stricter and stricter accounting evaluations.â
Brian Wesbury, chief economist of First Trust Advisors, told Dave Ramsey on Fox Business that the âoverreachâ of Sarbanes-Oxley mandated mark to market accounting â which he said made sense for liquid assets like stocks, but not for illiquid assets like bundles mortgage securities.
âI believe mark to market accounting has created about 65â70 percent of the mess that we are in today. So it is really a reaction to Enron, an overreaction to Enron that is helping create problems today,â Wesbury said.
Mark to market accounting requires that assets be marked for sale at whatever price the market will bear â even if you have no intention of selling those assets.
Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this ânew marketâ and give the bank $80,000 in cash immediately (so that you would have 20% down), or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely.
The fire sale prices of mortgage securities has caused markdown after markdown and unless the accounting rule is suspended âthe cancer will keep spreading,â according to the William M. Isaacâs Journal op-ed. Isaac was chairman of the Federal Deposit Insurance Corp. from 1981-1985.
âIf we do not halt the insanity of forcing financial firms to mark assets to a nonexistent market rather than their realistic economic value, the cancer will keep spreading and will plunge the world into very difficult economic times for years to come,â Isaac said.
Yet, politicians and the networks alike are calling for another regulatory response. The trouble with that is â as Hoover Institute senior fellow Richard Epstein put it, âBad regulation metastasizes.â