2011, a year of me-first politics and taxpayers getting swindled

2011 was a year in which the wretched and hideous state of American politics became crystal clear.  

Banks love being too big to fail and have aggressively lobbied the government to stay that way.

Fannie and Freddie continue to suck money from taxpayers like giant leeches: since 2008, about $73 million in taxpayer money has been used to pay the legal bills of former executives who are fighting fraud suits.

MF Global, a derivatives firm run by former NJ senator Jon Corzine, allowed hundreds of millions of consumer dollars to simply vanish.

Minorities and low-income borrowers (those who were supposed to benefit from the federal "housing strategy") became the biggest victims of the foreclosure crisis. In a suit filed in December, the Justice Department alleged that Countrywide--once the country's largest mortgage lender--steered more than 10,000 low-income minorities into risky subprime mortgages.

The cowardly postponement of the Keystone XL pipeline prevented tens of thousands of working-class Americans from getting new jobs.

The deficit problem and the payroll-tax holiday were simply kicked down the road.

Hopefully 2012 will be better. But it might not.

Putting a leash on Wall Street

Traditionally, the function of the financial sector has been to provide capital for business. Over the last few decades, however, it seems that Wall Street has become much more than that. As William D. Cohan argues in this Bloomberg article, Wall Street has now become a huge casino--with speculation, hedging, and arbitrage instead of craps, blackjack, and roulette--where the players get to make bets that have consequences for the US economy but not for themselves.

In the past, Wall Street transactions mostly consisted of actually buying and selling shares of companies. Recently, however, we have seen an explosion in derivatives, which allow investors to speculate on the price of shares or commodities without actually buying the shares or commodities themselves. Credit default swaps, a type of derivative, played a huge role in the credit crisis of 2008. Even Warren Buffett has called derivatives "financial weapons of mass destruction."

Even worse is the concept of "too big to fail." Currently, Wall Street bankers have no consequences for making risky investments--they are rewarded with huge bonuses if the bets pay off, and with bailouts if they don't. Some people think that the banks should simply be allowed to fail. The problem is, if letting the banks fail could lead to economic disaster, that's still an awful situation. People on Wall Street should not be able to take risks that could submarine the whole economy if they fail. Banks that are too big to fail are too big, period, and need to be broken up. Reinstating Glass-Steagall would be a good start.

What is the government doing to prevent another financial crisis like what happened in 2008? Predictably, nothing. Wall Street simply donates too much money to candidates of both parties. Oh, and most of Obama's economic team has ties to Goldman Sachs. The Dodd-Frank bill claims to be "finance reform," but it specified almost nothing and left the reforms up to a team of bureaucrats. The best way to guarantee that nothing good will be accomplished anytime soon is to leave something up to a team of bureaucrats.

Some libertarians have compared the current American economic situation to the events of Ayn Rand's Atlas Shrugged. In that comparison, Wall Street--along with Fannie Mae and Freddie Mac--would be the obvious choice for the role of Orren Boyle, the incompetent businessman who keeps himself afloat by using his connections to get constant favors from the government. Although Wall Street is not incompetent, they have been taking way too many risks that endanger the whole economy. Government has only been encouraging those risks, and in some cases (e.g. housing) mandating them. It's a classic case of crony capitalism.

The fastest road to hell is paved with government's good intentions

We've all heard the phrase, "The road to hell is paved with good intentions." The corollary to that should be that the fastest road to hell is paved with government's good intentions. Nothing but government has the power to take a good idea too far and turn it into an albatross around everyone's neck.

Obamacare is one obvious example. Nation building in Iraq and Afghanistan is another. High-speed rail in California or in the Midwest is a third. What usually happens is that government decides that something is a good idea and simply ignores the repercussions and costs of their actions. They don't stop to think about what Obamacare will do to small businesses' costs, or how many people will actually use high-speed rail in California, or whether the Iraqi and Afghan people will actually welcome us as liberators or not.

Perhaps one of the most powerful examples of government's good ideas gone bad is the National Homeownership Strategy, started by Clinton in 1994 and continued under Bush (see this BusinessWeek article for a full discussion). Basically, government decided that it was a good idea for more people to own homes. Here is an excerpt from the plan:

For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.


Translation: Many people wouldn't be able to afford mortgage payments, but it would be a good idea if they were able to buy homes anyway. So we need to use "creative financing strategies" (such as sub-prime lending) to "address these financial barriers."


Even "creative financing strategies," however, cannot make money appear out of thin air. So what happened? A lot of people bought homes with mortgages they couldn't afford. At the urging of government, many of these shaky mortgages were purchased by Fannie Mae and Freddie Mac. Eventually, starting in 2007, lots of people began defaulting on these mortgages. Fannie Mae and Freddie Mac collapsed. And the rest, as they say, is history.