Wednesday, October 8, 2008

You ain't talkin money? I can't hear ya

Today I attended a panel discussion on the economic crisis here at the University of Georgia. Three guys who were MBA professors of Real Estate and Finance were on the panel. They each gave their takes on what is happening, why it's happening, and what will happen in the future.

The overarching assertion was that regulation, not deregulation, had led to the subprime mortgage meltdown which in turn fucked up the credit markets on Wall Street. Their reasoning was that raising reserve requirements for investment banks - a form of regulation - had the effect of creating an incentive for investors to manufacture exotic, complex, and invaluable (as in unable to be valued) securities. These new, confusing securities would be given great credit ratings (by companies who are paid to rate them. Conflict of interest?) and therefore make the company or investor's assets look bigger and/or more solid. Inevitably, these securities, which had dubious substance and were made specifically to get around rules, would default, leaving the credit vacuum that has everybody's assholes clenched today. To me, saying that regulation creates incentives for investors to find loopholes and dodge the rules is the same as saying police enforcement creates incentives for criminals to be more crafty. Of course it does, dipshit. But does that mean we shouldn't enforce laws? To take away these incentives through deregulation would only mean that investors wouldn't have to put a new-fangled spin on their derivatives hustling, they could just do it openly.

They also criticized the Community Reinvestment Act and said that it pressured lenders to make risky loans to unqualified lendees. They described it, with noticeable cynicism, as "one of those social programs".

My question to them was this: As opponents of regulation, what is your response to those who claim that Bush-era deregulation, like the Commodities Futures Modernization Act, worsened the crisis by letting investment banks and commercial banks get in bed together? And has the resulting proliferation of Credit Default Swaps also created incentive for firms to overspeculate? Has this been more or less harmful than the effect of the Community Reinvestment Act?

Their answers basically were that society needs to stop pressuring people to buy homes. An exact quote, "What's so great about buying a home? People who live in an apartment get the same benefits." I gave the man enough credit to assume he was talking about the idea that many people are better off renting and putting money into business equity, rather than home equity. But not everyone can be a business owner. Home equity is the only way most wage-earners have to accumulate wealth and assure that they have some money to rely on for retirement, emergencies, etc.

They also said that people need to learn to better protect themselves and not fall victim to predatory lending or Wall Street shenanigans. This is what pissed me off bad. These guys act like everyone has an education in finance. When the average person is told they are getting a certain APR on a mortgage, what choice do they have but to take the lender's word for it? They may not trust the lender, but the vast majority of people do not know how to compute equivalent annual rates, they don't know what a balloon payment is. That's just on the mortgage side. On the finance side, to tell people not to fall victim to Wall Street hijinks is just ridiculous. How are you supposed to protect yourself from Wall Street when your pension is being gambled? The average person who has built up a pension or retirement has virtually no say in how their pension fund is traded, leaving them at the mercy of the investors handling it. What is the person supposed to do? Quit their job? Ask to cash out their retirement savings? That is scary shit.

The openly libertarian panel went on to say that we had to completely deregulate. No government involved in the market. This would cause lots of pain and innocent suffering in the short run, they said, but it would eventually cause the market to restore itself. Fuck you, dudes. Fuck you and your market. The government, TO WHOM WE PAY TAXES, has the obligation to protect the PEOPLE. If we let the market hit rock bottom, maybe it will eventually climb back to where it was. Home values will become real and not inflated. Sure, sure, I understand that. But think about the real-life implications of letting everyone's savings disappear, letting portfolios vanish and mortgages default on an epic scale. There would be widespread poverty, leading to chaos. The crime rate would skyrocket. Old people would be at the mercy of their children to take care of them. Low-rent apartments and projects would be overrun. The lack of credit would mean that only the upper class could own homes. Public schools would become even more overrun. A 0% reserve requirement would mean that banks would just be taking your money, with nothing to guarantee that it would be safe. Your bank account would therefore effectively become a security. Remember the Chris Rock joke about white people's reactions to being broke? "How did this happen?!? I'm WHITE!!". Yeah, that's pretty much the reaction we would see nationwide.

That's my fundamental objection to libertarianism. Listening to a Libertarian talk about economics is like being in a Macroeconomics class. It's all conceptual and based on the idea that people are rational and know best. While I agree that people are rational and know best, there is also the fact that people are dishonest and will exploit any avenue they can for gain. People do, in fact, need to be protected from themselves and others, financially and otherwise. In the libertarian's world, people and firms wouldn't spend or loan beyond their means. But they do.

Anyways, I put in my early vote for Barack on Monday. I will respond to any discussion in the comments of this post, if anyone would like to talk or debate.