Mommas, Don’t Let Your Babies Grow Up to Report on the Government’s Financial Reforms

If you do, they will almost certainly disgrace your family by writing reports that can be interpreted in only two ways: (1) the reporter is a shill for the government, passing off government propaganda as news and analysis; and (2) the reporter is dreadfully incompetent and naïve with regard to government policies. Sad to say, many reporters display both sorts of failings simultaneously.

I am provoked to make these observations not merely by having been exposed to the mainstream news media for the past fifty years or so, but also, just this morning, by having blundered across an Associated Press article headlined “Obama Seeks to Overhaul Financial Rules.”

Of course, the headline can’t be accurate. Barack Obama knows nothing about finance, so he would not have the foggiest idea where to start in overhauling the existing financial rules. But let’s be generous. The story attributes to the emperor himself a project that is actually being carried out by his scheming lackeys in the Treasury Department, the Federal Reserve System, and other parts of his vast bureaucracy. These faithful (and some, no doubt, not-so-faithful) servants are of course acting in the emperor’s name, whether or not he understands the details of their machinations.

“The goal,” the article informs us, “is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.” This claim cannot be right. My best guess is that the actual goal is to give the impression of taking actions that will prevent a recurrence of these recent troubles, the better to shift the blame away from the actual perpetrators—various government officials and their harmful policies—and thereby in effect to place the blame on various financial actors and institutions in the private sector (if indeed there remains much of a truly private financial sector in the wake of all the recent government takeovers).

The article goes on to say that “in devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system.” Let us briefly consider them.

First alleged weakness:

The need for an all-seeing government entity to detect institutional stresses that threaten the entire financial system. Think of the mortgage-backed securities that are still weighing down bank balance sheets.

Should we laugh or cry? “An all-seeing government entity to detect institutional stresses”? Unless this expression is meant as a joke, the reporter here reveals either terrible incompetence or shameful complicity in spreading government propaganda. The idea that a government agency, or a hundred government agencies all rolled into one gigantic can of red-tape worms, can be “all seeing” in its purview of the country’s financial transactions is ludicrous. We have miles and miles of financial laws and regulations on the books now. Most of them have been in force for decades. We have thousands of lawyers, accountants, economists, and other charlatans working for dozens of government agencies at every level who are, and long have been, charged with ensuring that nobody engages in financial hanky-panky. Did anyone in this kingdom of jobbery foresee the financial debacle that reached crisis proportions late last summer? Did not all of these supposed watchdogs, instead, devote themselves to proclaiming ceaselessly for years on end that everything was hunky-dory and that they had matters well in hand. Are we supposed to believe that these people will now, inexplicably, develop an acute case of competence?

Second alleged weakness:

The inability to step in and unwind large and complex institutions before they fail and become the thread that unravels the fabric of the system.

Ah, yes, we must empower the government to mount preemptive attacks against the greatly dreaded dragon of systemic risk. In this case, however, St. George seeks the power to slay a dragon that exists more in the hyperbole of government press agents than in reality. We have been told repeatedly that the financial system contains a number of large boulders, any one of which might set off a world-crushing avalanche if it were allowed to begin rolling down the hillside freely. But scientific evidence of such potentially destructive big rocks is as rare as hen’s teeth. The tale makes a splendid accompaniment, however, to a raid on the Treasury by a big bank or other mega-institution that, seeing its chance, seeks to snatch trainloads of money while the snatching is good.

Even if systemic risk does exist, why should anyone believe that the fakers and time-servers employed by a government regulatory agency will have the ability to gauge its magnitude and to identify the specific firms that must be eased away from the precipice—always, of course, at the great expense of taxpayers and holders of dollar-denominated assets?

Let’s be frank: systemic risk is the greatest—and perhaps the phoniest—excuse for unwarranted bailouts ever devised by the mind of man. After all, who wouldn’t prefer to cough up hundreds of billions of dollars to ill-managed banks, rather than enduring the collapse of the world economy?

Third alleged weakness,

The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity.

And why, pray tell, did the bank managers think that they did not need more equity? Might the answer have something to do with the various explicit and implicit ways in which the government has placed itself in readiness to bail out a big bank whose ultra-risky bets turn sour? Might government deposit insurance explain why depositors continued to hand their money over to banks run by high-stakes gamblers? If people had known that their own funds were always at risk and that they, and they alone, would have to bear fully any losses that arose, they would not have behaved as they did between 2002 and 2007. Government actions and promises to take the risk out of risky behavior produced exactly what any thinking person would have expected: massive moral hazard. Now, the government’s huge bailouts are validating all the expectations that the banking gamblers and others entertained during the boom, thereby setting the stage for the next destructive, government-induced boom in malinvestments. Moreover, the same government officials who were fundamentally instrumental in making possible the malinvestments of the past decade (and in some cases their chosen successors in office) have the gall to pretend that they are now fixing the system, even as they actually do nothing but reinflate the same ill-fated bubble.

Fourth alleged weakness,

Consumers and lenders whose unwitting or reckless credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama [sic] is likely to recommend creation [of] a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.

I tell you, these guys could do stand-up; they’re hilarious. They have the outrageous chutzpah to imagine that they—the most financially irresponsible parties in the history of the world, the very people who control a government whose unfunded obligations run in excess of several times the country’s gross domestic product, the same people who whipped and goaded Fannie, Freddie, and the banks to dish out these dodgy mortgage loans in the first place—will henceforth oversee how private lenders and borrowers conduct their transactions, to insure that everyone acts with becoming prudence and responsibility. Ha ha ha ha—I’m rolling with laughter, I tell you. Does anybody take such drivel seriously? Really, anybody?

Well, okay, maybe the reporters for the mainstream media do. At least, they continue to file their reports with straight faces. But behind the scenes, Barney Frank, Chris Dodd, Chuck Schumer, and the rest of the congressional carnival barkers have to know better. They also have to know, however, that even though they played key roles in shoving first the financial system and then the whole economy over the brink, they have emerged from the mess that they made smelling like roses. They still have their power; the campaign contributions from the fat cats keep pouring into their coffers; and they continue to drive the Obama administration’s make-believe financial-reform bills through the congressional maze toward their ultimate enactment as the next round of bad financial law—the selfsame sort of bad law under which this country has suffered ever since Ben Cohen, James Landis, and Tom Corcoran fired up this destructive locomotive during the early New Deal.

Don’t expect the financial reporters to make any sense of all this, however. The evidence seems overwhelming that they are either clueless or co-opted by the government—and quite possibly they are both.