What Caused This Crisis?

I am sure I’m not that different from many others when I ask the simple question, what happened?  How did the banks get into such a mess?  What didn’t they see, and what regulation failed?  Was the reserve ratio that the federal reserve demands too low?  Did debt move from regulated to unregulated, and if so, why would that have caused a failure of regulated banks?  How is it that the vast amount of debt went unrecorded until recently?  And what are we doing wrong now?

The New York Times offers a new insight into what had happened.  According to this article, a decision in 2004 by the SEC, headed by William Donaldson at the time, permitted banks to exceed the reserve ratio in their investment houses, and money seemingly flew freely between the two.  There was meant to be oversight of the banks’ health at the time, but that oversight never happened.

Why did the banks seek this change in 2004?  They did not believe they could compete against the large investment houses with so much money tied up in case of a credit crunch.  Put another way, we forgot some of the lessons of the 1920s.

And so it’s now obvious to all.  President Bush has not only presided over the worst financial debacle since the Great Depression, but he and his team failed to learn from the mistakes of that era, making him worse than President Hoover, in my book.

What do we need to do to fix the problems?  Some of it has already happened.  Banks have become very conservative, and perhaps are leaning too far: it’s very hard to tell when the country is teetering on a recession.  Some of that conservative nature needs to be codified by reversing the 2004 decision or requiring investment houses to meet the reserve ratio.  In order to figure out which we have to question whether or not we can let a large investment house fail.  If we cannot, then more regulation is appropriate.  One way to split the baby is to require regulation of total assets and debt above a certain number, say the $5 billion talked about in the article.

Happy Independence Day!

fireworksHappy Fourth of July!  232 years ago, descendants of peopel seeking religious freedom declared that they would not be subjugated from afar by a tyrant and his parliament.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Thomas Jefferson, The Declaration of Independence, July 4, 1776

Since then nearly every government in the world has recognized the basic right to have a say in how one is governed, excepting of course Iran, Libya, Saudi Arabia, Zimbabwe, North Korea, China, Russia, and the United States.  Even as he wrote those words, Jefferson held slaves on his property.  It would take another eighty-nine years for black people to be free, and another 92 years for their children to go to the same schools as white people, and another 51 years for them to have the first black national candidate for president on one of the major party tickets.

Put another way, Jefferson lied.  He did not hold those truths to be self-evident.  People had to fight for them every step of the way, starting with patriots in the American revolution, continuing for the rights of black people during the Civil War.  When we do not stand up for their rights of others, we lose our ability to defend our own rights.  The examples are shameful.  In Germany, nobody stood for others’ rights and the result was a world war and a holocaust that afflicted all of Europe, while back in America we once again jailed our fellow Americans because of the color of their skin.

Now in America we see another group once again fighting for their rights.  That a person is gay does not offend my rights as an individual.  Even were I to find homosexuality offensive in some way (which I do not), we as Americans have the right to offend.  And we do it as early and as often as we can.  Only heaven help the person who does it to us.  The tyranny of the majority part of human nature, and requires each of us to check ourselves about our beliefs.  And so, when Californians go to the polls in November, they will have a choice: indulge their bigotries and impose their will on a minority of people who merely want to the same treatment as others, or stand up for a group who has always held fast that they too are Americans and can and should do their part as patriots.

The tyranny of the majority doesn’t stop at race or sexual orientation, but is rooted in America in religion.  George W. Bush is President of the United States in large part because he galvanized a group of people who wished to impose their religious values on all of us, and he and they have been remarkably successful.  The Office of Faith-Based and Community Initiatives, an organization that gives money to churches, has been held to be constitutional, while school vouchers have stripped away disparately needed money from improving public education.  It is not Muslims who need to fear for their rights, but those of us who want nothing at all to do with religion.  Can you imagine a presidential candidate, never mind a president, who did not end every speech with “God Bless America”?  Our founders saw this fear and clearly placed freedom of religion in the First Amendment of the Bill of Rights.

Today is not also the anniversary of our founding, but also the 182nd anniversary of the deaths of Thomas Jefferson and John Adams.  Those who believe that partisanship is an invention of the late 20th century should take the time to read John Adams, by David McCullough, in which he describes the bitter battle between then opponents in 1800.  That particular bit of rivalry led to the historic decision of Marbury v. Madison in 1803.  Our rivalries are as the framers intended, meant to spur good government.  Whether that goal is met today is an open and fair question.