Wednesday, October 01, 2008

George Will blames the welfare state for credit crunch

George Will states the obvious today: that "Main Street" shares some responsibility for the housing bubble and credit crunch, since many Americans bought more house than they could afford or otherwise overindebted themselves.

As usual, though, ideology and moralism compromise Wills' insight. Here, for example, is a tincture of unquestionable fact glossed by an unquestioned assumption:
Democratization of everything is supposedly an unquestionable good, but a blizzard of credit cards (1.5 billion of them, nine per cardholder), subsidized loans and cheap money has separated the pleasure of purchasing from the pain of paying. Furthermore, the entitlement mentality fostered by the welfare state includes a felt entitlement to a standard of living untethered from savings.
The U.S. is far less of a welfare state than many European countries that do not share our culture of debt. In France, people look at you funny if you pay for an ordinary store purchase with a credit card (at least they did 2-3 years ago, when the WSJ published an article on the subject). In my New Jersey home, the first credit card solicitation arrived for my son when he was fourteen. What force has "democratized" debt to that obscene extent? Not government entitlements -- not "subsidized loans" -- but free-market capitalism run wild, enabled by a culture of deregulation. That is, by the Bush-era Office of the Comptroller of the Currency's aggressive preemption of state banking laws when states attempted to crack down on predatory lending and other forms of customer abuse. By Alan Greenspan's disregard of warnings that the Fed must rein in mortgage lenders. By credit card deregulation that allowed issuers to charge whatever interest rates they want - and pile fee on fee when payments are late.

Obama's diagnosis is more cogent than Will's. He laid it out most fully back in March, at Cooper Union in New York:
This loss has not happened by accident. It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.

Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one – aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy...

When all is said and done, losses will be in the many hundreds of billions. What was bad for Main Street was bad for Wall Street. Pain trickled up. ...

we need to regulate institutions for what they do, not what they are. Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies. It makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't originate from banks. This regulatory framework has failed to protect homeowners, and it is now clear that it made no sense for our financial system.
As they say in Blogland: read the whole thing.

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