By Judd Gregg - 04/04/11 10:40 AM EDT
The primary driver of the fiscal disruption we experienced at the end of 2008 was not greed or excessive speculation or even fraud in the lending markets. It was not the explosion of syndications of mortgage loans or the use of derivatives to try and insure inherently unstable assets. It was not regulatory somnolence.
Rather, this crisis, with its ensuing international recession and near-meltdown of our financial system, had as its root cause the social-justice agenda of Congress.
For years this country’s political system has had as one of its basic rules the importance of promoting and subsidizing the ownership of a home. It has not been just a party-specific goal, but the cause of almost everyone running for office.
Traditionally, it was expressed through the use of generous tax deductions for mortgages. But it was also expressed in thousands of other ways through the promotion of all elements of the vertical supply chain that created the products, built the homes and financed the buyer. It was, and is, a cultural fact in America that everyone is expected to be able to own a home.
This was a good cause when done in a reasonably orderly and restrained way, when the lender knew the borrower and his or her track record and when the buyer had to pay for a significant part of the home and prove he or she could finance the rest. There were serious and ascertainable underwriting standards restricting both buyer and lender exuberance.
This changed in the late 1990s. Congress embarked on a course of social justice, which said if you wanted a home you should get it. No need to be accountable for your ability to pay for it, just go and buy it on extraordinarily generous credit terms.
This was all expedited by Fannie Mae and Freddie Mac. They were allowed to pay little or no attention to underwriting standards because they were going to sell the loan. The derivatives market ignored this fundamental flaw and the failure was further accelerated by computer-driven models supported by rating agencies that failed to note human nature.
It was a situation where Congress, in its desire to pander to the politics of the issue, demanded a system be put in place that required water to run uphill.
Now, in a unique act of arrogance, Congress has passed Dodd-Frank, named for former Senate Banking Chairman Christopher Dodd (D-Conn.) and former House Financial Services Chairman Barney Frank (D-Mass.).
This bill takes the market system of home buying and overlays it with an antithetical system to meet the social goals of the Democratic lawmakers who wrote it.
Rather than give the markets more stability and depth, Dodd-Frank has in fact made them less stable and weaker by beginning the process of pushing offshore huge amounts of financial activity traditionally initiated and controlled here.
This not only costs us American jobs, but it makes our credit markets significantly weaker and less competitive. It also layers a new and even more destructive series of regulations on top of the existing regulatory chaos with no concern for the effects they have on market forces and human nature.
A good example would be the debit card fee price control language, which already has led to a significant lessening of the average American’s access to credit and liquidity.
Along with a panoply of new regulatory initiatives from existing agencies, we have seen arise the Consumer Financial Protection Bureau, a totally independent and rogue organization which answers to no one.
It has its own appropriations, which are not reviewed by any elected official. Its cause is whatever its director deems is good for our fellow Americans. It is a sort of a throwback, a “super commissar of the people.”
It was structured by a group of Harvard thought police for the benefit and intellectual entertainment of the left and is led by people who do not believe in markets, entrepreneurship and especially profit as prime motivator of America’s success.
If it were an experiment or demonstration program, it would be dangerous. But as a free-standing, unfettered, robustly funded agency with a cause to pursue, i.e., to end market forces as an influence in lending, it is the most dangerous and powerful place on the federal landscape since J. Edgar Hoover ran the FBI as a personal police force.
The outcome of all this overlay of social justice governance will not be that we avoid another financial crisis or that we catch the next entity that is too big to fail before it does. It will be that credit on main street America, where the jobs are created, will contract. And some will scratch their head and ask “why?” to which the answer is “too much Congress.”
Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and also as ranking member of the Senate Appropriations Foreign Operations Subcommittee.