The New Robber Barons
What would happen if the National Football League did away with its referee corps? While some might find excitement in the idea of each team doing whatever it desires to defeat its opponent, it's obvious that the resulting avalanche of injuries, disputed play and game outcomes, and other forms of disorder would destroy the league's credibility and ultimately cost it revenues as fans switch to other, less chaotic forms of entertainment.
Certainly, the NFL would never consider sending its referees packing tomorrow – even though the referees themselves can be quite unpopular with coaches, players, and fans, especially when they make the "wrong" call at an inappropriate moment.
Football refs probably hear the words "You suck!" more often than any other carbon-based life forms, including politicians. But no one who's ever uttered an epithet at a ref would ever advocate doing away with the zebras altogether.
Unfortunately, while there's no danger of a referee-less NFL, certain sectors of our economy have been functioning (if that's the word) almost entirely unofficiated. Most prominent among these is the mortgage-lending industry, which has been about as tightly regulated as professional wrestling. And the consequences have been dire – for lenders, for borrowers, and for the American economy as a whole.
At the root of this situation is the anti-regulatory attitude that has pervaded our culture for the last few years. After all, business regulations are a "restraint on freedom," and prevent "the market" from functioning "efficiently." So, if someone wants to borrow more money to buy a house than he can afford, it's his problem, and the government needs to just stay out of it. Right?
The problem is that economic decisions do not occur in a vacuum – their effects ripple through the entire economy and society at large. And the regulations are there to protect the public interest from the excesses of the free, unfettered market.
When mortgage regulations are weak or nonexistent, the consequences are predictable – lenders try to drive up their short-term profits by authorizing an increasing number of high-risk loans, thus increasing their exposure if the loans do not get paid back. And investors – not to mention bank depositors – are left holding the bag if a foreclosure happens. Which is exactly what's been going on now at a national level.
It's easy to blame borrowers who take out massive home equity loans to gold-paint their stairwell handrails. To be truthful, it is hard to work up much sympathy for such profligacy. But the ultimate decision on whether or not to authorize the loan rests with the lending institution. And it's pretty obvious that many of them were screening their loan applicants about as closely as Britney Spears screens potential husbands.
Many homeowners were duped by authorities who assured them that, yes, Adjustable Rate Mortgages (ARMs) were the way to go. Former Fed chairman Alan Greenspan, among others, plugged ARMs to anyone who would listen. Unfortunately, many first-time homebuyers did just that, thinking that wealthy plutocrat Mr. Greenspan had their best interests at heart. They've learned a rough lesson.
Twenty years ago, the virtually-unregulated savings and loan industry collapsed after a bevy of institutions, acting like fly-by-night outfits, made a series of questionable get-rich-quick investments that unsurprisingly didn't pan out.
Hundreds of thousands of Americans lost their savings to this irresponsible behavior – among them the depositors of Old Court Savings and Loan here in Maryland. Eventually taxpayer had to step in to foot the bill to bail out these institutions – for billions of dollars more than it would have cost to simply implement a few well-thought-out regulations to prevent the nightmare from happening in the first place.
Sad to say, we're repeating history now with subprime lenders. And we've only hit the tip of the iceberg – with the dollar collapsing and foreign investors increasingly looking for alternatives outside the United States, this situation has the possibility of getting very ugly.
This is just another example of the high cost of conservative dogmatism. Yes, the housing boom of the early part of the decade was built on sand. But we shouldn't intervene to solidify it, because that would involve Government Regulation, and Government Regulation Is Bad.
Nobody likes regulations on business. Just like nobody likes football referees. But without them, we have chaos. Or worse.
As we're now finding out. The hard way. Again.