September 24, 2007


IMPEACH BUSH


IMPEACH CHENEY

ANOTHER DEREGULATION MESS

You can almost hear Oliver Hardy turning to Stan Laurel and saying with disgust, "This is another fine mess you've gotten us into." The free-market disciples of deregulation tell us that the road of deregulation leads to paradise. History says otherwise. The Crash of 1929 came about largely because there was no regulation and speculators ran wild. In California we were getting privatized electricity and we got Enron and a huge mess. Now we've had subprime mortgages with speculators running wild again, and it puts the whole economy at risk. Robert Reich writes about it in this column at www.commondreams.org:

The sub-prime mess, the huge risks taken by hedge funds, and the conflicts of interest that led to Enron and kindred scandals, are all the consequences of serial bouts of financial deregulation. Since the 1970s, in the name of free-market efficiency, Congress and presidents of both parties repealed key protections put in place by the New Deal. But the main effect has been to engineer windfall profits for financial insiders, replace real productive innovation with financial engineering, shift wealth from families to corporations, and put the entire American economy at ever greater risk.

As a result, the economy has increasingly come to depend on asset bubbles — overvalued stocks, overpriced real estate, and dubious financial instruments like derivatives. The bubbles have been pumped up by speculative borrowing. The borrowing feeds on itself, as it did in the 1920s, since an inflated asset is handy collateral for still more borrowing. Alarmingly, these bubbles turn out to be interconnected — hedge-fund profits reliant on high-yield sub-prime mortgages, and a soaring stock market bid up by risky private equity deals — so if the air goes out of one bubble, it goes out of others. That’s why the crisis is so hard to manage, even by a very aggressive Federal Reserve.

Supposedly, we can’t have depressions anymore, for three reasons. First, the Fed has gotten far more sophisticated about containing financial panics. In recent weeks, the Fed’s and the world’s other central banks have poured hundreds of billions of dollars into credit markets so that risk-averse banks keep lending against shaky collateral. This in turn keeps the price of that collateral — bonds, stocks, real estate — from sinking still farther in a 1929-style meltdown. However, once a bubble bursts, low interest rates can’t necessarily revive it; the Fed can cheapen money, but it can’t make anxious creditors put it at risk.