The Economy that Wrecked Itself

Statement

The Economy that Wrecked Itself

This train did not wreck itself, but nobody is taking responsibility. Through action, inaction, and failed oversight, Congress (both parties) and the Bush administration have crafted this economy. Political action committees (PACs) representing the financial sector contribute heavily to campaigns and lobby strongly against regulation. Unfortunately, there is no comparable force lobbying on behalf of the people for transparency, fair lending, and responsible asset management. The members of the House that voted for the bailout on Monday received an average of 51% more campaign contributions from the finance, insurance and real estate sector than those that voted against it. That's no coincidence.

My opponent, Senator Mike Enzi, has worked diligently to deregulate the financial sector over his 11+ years on the Senate Banking, Housing, and Urban Affairs Committee. During this election alone he has received over $250,000 in contributions from finance, insurance and real estate PACs. That's about $200,000 more than he's received from the people of Wyoming. Senator Enzi has not been a casual bystander in our economic crisis - he has been instrumental in its creation.

The 1999 Gramm-Leach-Bliley Financial Services Modernization Act repealed the 1933 Glass-Steagall Act which maintained a separation between banks, securities firms and insurance companies. Glass-Steagall was designed to stop speculative investment by commercial banks and to help prevent the chain of events that led to the Great Depression from ever happening again. Gramm-Leach-Bliley reversed the separation by allowing commercial and investment banks to merge. Enzi supported Gramm-Leach-Bliley.

The Commodity Futures Modernization Act (CFMA) of 2000 prohibited the Federal regulation of ‘derivatives,' including Credit Default Swaps (CDSs) which are at the heart of the current economic crisis. Enzi supported CFMA. In 2002, Congress attempted to amend CFMA to provide regulation of certain energy related derivatives allowed through the "Enron loophole." Enzi opposed the amendment, stating that "During debate of the Commodities Futures and Modernization Act we examined the oversight and regulation of energy derivatives extensively. We concluded we had the proper amount of oversight for a new and emerging new business. If we start to regulate an industry that is in its infancy, we run the risk of stifling competition and reducing the possibility of it reaching its full potential." We are now beginning to feel the full potential of an unregulated ‘derivatives' market.

Our current economic crisis largely began with irresponsible and under-regulated mortgage lending practices. It was exacerbated by a creative financial vehicle called a collateralized debt obligation (CDO) whereby many risky mortgages were grouped together and re-packaged into a (theoretically) less risky product that could be traded without much, if any, oversight. The crisis was further compounded when financial institutions bought and traded unregulated derivatives called "credit default swaps" (CDS) that provided insurance coverage for the CDOs if they did fail. When individual payments for the high risk mortgages rose dramatically as the federal funds rate was increased to head off inflation, a chain reaction began. Mortgages defaulted en masse, the CDOs began to fail, and then the CDSs were called in, but there wasn't enough insurance money to go around.

So how do we get the train back on track? There are three objectives that we must achieve: protect individual Americans and homeowners from the bad decisions of the finance industry; restore liquidity, trust, and confidence to the market; and realize transparency and proper regulation so that this won't happen again. These objectives must be accomplished without any long-term addition to the national debt. Our government has no obligation to bail out failed companies, stop bankruptcies, cover for CDSs, pay CEOs, or compensate stockholders. Failure is an important part of capitalism - it should be accepted and learned from, not rewarded.

Monday's proposed bailout package failed to achieve a majority in the house because Americans were thoroughly outraged at the idea of spending $700B to buy up bad investments and rescue profiteers. That's completely understandable. Proponents claim this $700B would be an investment, but we'd be buying a product that nobody else wants - taking the bad with the good. I'd prefer a plan where we focus on helping homeowners by temporarily purchasing and refinancing troubled primary mortgages to avoid foreclosure. At the same time, if we need to fluidize the credit market, the federal government can dramatically increase loans to banks that are not teetering on the brink of collapse, so that they can buy up the assets of the losers, and extend credit as needed. Finally, Congress must rebuild a sound regulatory structure and undo the legislative damage that has been done by Enzi and others over the last decade.

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