by John M. Curtis
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Copyright April 1, 2008
All Rights Reserved.

eacting to the collapse in investment icon Bear Stearns, the White House proposed the biggest overhaul of the U.S. financial system since the 1929 stock market crash. Seeking to reassure and stabilize markets, Treasury Secretary Henry “Hank” Paulson unveiled his 216-page plan designed, if nothing else, to keep other banks and investment houses from going under. When JP Morgan Chase announced it was buying Bear Stearns March 17 for a paltry two dollars a share, the Dow Jones Industrial Average tanked, until Federal Reserve Chairman Ben. S. Bernanke urgently lowered the Federal Funds Rate 75 basis points, dropping the prime to 5.25%, the lowest since 2001. Bernanke, a student of the 1929 crash, took emergency steps to avoid another run-on-the-bank, seeing the Bear Stearns meltdown as an ominous sign for credit markets and the overall economy.

      Bernanke gave Fed insurance to JP Morgan Chase's $236 million deal, blindsiding share-holders, watching holdings plummet from $40 to $2 a share. Bernanke's bold move to help Bear Stearns avoid bankruptcy harked back to former Fed Chairman Alan Greenspan's 1998 bail out of Wall Street's elite hedge-fund Long-Term Capital Management. Greenspan faced the same criticism as Bernanke, saving Wall Street but ignoring the epidemic of foreclosures and bankruptcies affecting ordinary taxpayers. Paulson's ambitious plan won't happen in Bush's term, passing the buck to the next president. No one talked about reforming financial markets the last time the stock market crashed in 2000, the final year of President Bill Clinton's term. No one blamed federal regulators then for the stock market bubble, wiping out nearly $ 5 trillion in market wealth.

      Paulson's economic bromide amounts to a PR stunt designed to calm jittery financial markets, dangerously close to an economic calamity. Paulson's plan to streamline obsolete agencies, some dating back to the Civil War, won't provide the needed reforms to prevent another economic disaster. Setting up a Mortgage Origination Commission to set minimum standards for the mortgage-banking industry doesn't deal with today's rash of bankruptcies and foreclosures pushing the economy into recession. Paulson should be urging the Congress to reinstate the depression-era Federal Housing Administration to provide immediate financial relief to homeowners facing foreclosure. Allowing more bankruptcies and foreclosures guarantees that previously cash-rich homeowners don't have the resources to boost spending and keep the economy out of recession.

      Talking up the Fed's regulatory authority does nothing to address real needs of homeowners and the mortgage industry strapped for cash with few options. Without addressing the liquidity crunch and foreclosure crisis, Paulson does little to help struggling consumers and economy. “Secretary Paulson has been working on this package for about a year, so it's not like pulling a rabbit out of a hat,” said White House press secretary Dana Perino, touting Paulson's fix. “It's very constructive, deliberate thinking amongst the best minds in economics,” saying nothing about what to do with the liquidity crunch and rash of bankruptcies. Paulson's plan satisfies no one other than Wall Street's spin machine, worried about an erosion in public confidence. While there's nothing wrong with bailing out Bear Stearns, there's plenty wrong with the White House turning its back on ordinary homeowners.

      Over-regulating the mortgage banking industry makes it more difficult to get credit to homeowners. “I'm not suggesting that more regulation is the answer or even that more effective regulation can prevent periods of financial market stress that seem to occur every five or 10 years,” said Paulson, rejecting the idea that predatory lending practices led to the rash of foreclosures upending the secondary mortgage market. So-called mortgage derivatives, sold in pools to investment houses, began to implode, causing the liquidity crunch at Bear Stearns and other investment firms. “Dismantling the thrift charter and crippling state banking charters will weaken banking in America,” said Edwar Yingling, president of the Mortgage Bankers Association. Like the ‘80s saving and loan crisis or junk bond scandal, Wall Street greed drove investors to seek bigger profits and more risks.

      Paulson's scheme to overhaul the financial system diverts attention from needed help to homeowners faced with rising bankruptcies and foreclosures. Senate Banking Committee Chairman Christopher Dodd (D-Conn.), a recent presidential candidate, pointed the finger at “a failure of leadership,” of the White House, not, as Paulson suggests, lax regulations. Bear Stearns' collapse highlighted today's fragile economy, stretched to the breaking point by the Iraq War, costing a whopping $12-16 billion a month. Like the savings and loan crisis and junk bond scandal in the ‘80s, the stock market meltdown in 2000 and now the subprime debacle today, Wall Street greed caused the problem. Over-regulating the market and handing more power to the Fed doesn't deal with today's foreclosure crisis threatening the economy. Paulson should find help for homeowners, not just Wall Street.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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