Ethicalego Opinion

Rebuild America's financial system on a foundation of ethics. 

Congress created the Federal Reserve in 1913 supposedly to control banking and to prevent these type crisis. The Federal Reserve failed to prevent this financial crisis so giving it more powers as President Bush’s plan suggests does not seem wise. The system fails from a lack of institutional ethics. If society tolerates them, unethical people will always find ways around controls designed to prevent abuses of power.

Banking and investment managers lobby Congress and government agencies to change regulations to suit them. They successfully place their members as Treasury Secretary and as department heads in the agency. They lobby in favor of political candidates and for judges sympathetic to their position. Overtime, they will change regulations and override the checks against their greed and excesses.

During the 1990s, the banking industry changed banking laws to include the "Universal Default" policy. Before this change, a credit card company granted credit at one low rate with the choice to increase interest to a 24% default rate if the customer defaulted or made a late payment. The Universal Default rule allowed them to increase a customer’s credit card interest to the 24%default rate or higher even if the customer paid them on time, but made a late payment to another lender.

This changed law was as a formula for disaster for consumers who made a late payment and had large balances on several credit cards. Regulations and controls did not stop this abuse. Ethics did, because many banks refuse to exploit customers this way. This practice was a warning to banking and government officials they needed to take corrective action. They didn’t.

Regulators understood the predatory nature of subprime interest rates that increased the likelihood some borrowers would default on their mortgages. Nevertheless, they did not ban them. Why bother to change policy that negatively affected only those borrowers classified minority, poor and unsophisticated, but created extra profit for banks and their investors. They did not expect the snowballing effect of subprime loan defaults to jeopardize the stability of some banks.

High housing prices exceeding affordability for many homebuyers should have acted as a market check against spiraling housing costs. It did not, because allowing this self-regulating market check in the housing market would have decreased profits for builders, suppliers, lenders and real estate agents. So, the government neutralized it by ordering builders to include a percentage of low-priced houses in some new projects.

This may have eased housing market prices if affordable housing meant smaller houses with fewer facilities built at less cost. Instead, it meant houses built at the same cost, but priced lower for some buyers with those losses recouped by charging more for the other houses in the project. This worked, because the people buying the other house usually had a better credit rating and could qualify for higher mortgages.

This pretense worked. Bankers earned more money from larger mortgages and suppliers, builders, insurance companies and others continued their profits and fees. In addition, lenders encourage homeowners to spend their imaginary home equity by taking out equity loans to pay for automobiles, furniture, vacations and other fleeting indulgences. Investors joined in by supplying money for those ill-conceived, poorly secured loans.

Eventually, consumers realize their debt situation and they slowed their spending. Many people with subprime loans defaulted on them. Again, this consumer action should have forced changes in the financial system and checked lending abuses. It has not, because President Bush eased this pressure on bankers by sending a tax rebate to consumers to restart their spending. In addition, bankers are less motivated to devise institutional solutions that may cost them profits when Congress promises legislation to do the job for them. Government actions will acerbate problems in the national economy that require free market solutions.

Financial experts tell us the nation’s economic future needs government to save and to restore investors and consumers confidence in this financial system. I am skeptical about their advice. They are experts who failed to recognize the credit and investment abuses that created this financial crisis or they saw them but failed to speak out or act against them.

Even now, government and financial experts talk much about the need for more controls, but little about the need for enforced ethical standards. So, the pigs of banking and investing want to rebuild the nation’s financial house with the sticks and straw of regulations vulnerable to the next attack by the greedy, unethical wolves.

Contact Kenneth Brooks P.O. B 882, Vallejo, CA 94590, opinion@ethicalego.com