They bestrode the global capital markets like Supermen and Wonder Women, a cohort of modern-day Wall Street overlords. Federal Reserve bankers, SEC agents, Treasury Department officials, and White House constituencies all the way to the president of the United States had an impact on the 2008 financial mess — a process that occurred over several decades, not just in 2008.
To be clear, I’m not belittling the role the banking industry and Wall Street played in all the financial chaos.
Those familiar with my thoughts know I write often on the government and the financial industry’s role in the most significant recession seen since the 1930s.
But this time I want to expand the “guilty box” to those in charge, those who were supposed to prevent, or at least foresee, the dangerous dynamics of a financial industry allowed to run amok.
Storied are the names of individuals and officials who, one way or another, contributed to the crisis — and it’s their past and present prominence that makes their negligence even more puzzling.
Some of these people were in charge when the seeds of the 2008 disaster were planted decades ago, yet they are here today blaming their successors for the regulatory and policymaking misdeeds.
A Quick History Lesson…
The history of America might best be described as a series of booms followed by economic downturns or busts. The big busts are then followed by legislative crackdowns, to include holding any guilty parties accountable and the adoption of new regulations.
For instance, after the crash of 1929, the Pecora Investigation was largely responsible for the head of the New York Stock Exchange going to prison and the passage of the Glass–Steagall Banking Act of 1933, the Securities Act of 1933 and the Securities Exchange Act of 1934.
Following the Savings-and-Loan Crisis of the 1980s, more than 1,100 individuals were prosecuted, including top executives at many of the largest failed banks, and made famous the ‘Keating Five’ political scandal.
In the early years of the new century, the Nasdaq crash revealed widespread corporate accounting fraud with top executives from WorldCom, Enron, Qwest and Tyco, among others, going to prison.
So, there was a reasonable expectation as the dust settled on the 2008 financial crisis, that a similar round of crackdowns and enforcement actions would ensue.
But that never happened.
…On a Long List of Culprits
Forbes Magazine ran an interesting story on the subject, debunking the idea the crisis resulted from Wall Street negligence or greed — or both.
And while I won’t go as far as to say the big banks and hedge funds should get a pass, it’s noteworthy there are several factors at the root of the financial crisis, and arguably, big government’s fingerprints are all over it — starting back in the 1970’s.
You see, it all began with Jimmy Carter and something known as the Community Reinvestment Act that came to life in 1977. (Read more about that legislation here — and how it led to the housing bubble’s lax lending standards here.)
Fortunately, at the time the Carter administration originally concocted the scheme record inflation and sky-high mortgage rates helped prevent the plan from ever getting off the ground.
However, Bill Clinton revived the legislation about 20 years later and through Attorney General Janet Reno and HUD Secretary Andrew Cuomo, pushed the plan to the extreme. (The New York Times wrote on the subject highlighting how critical the law was in the government’s economic strategy at that point in time. As the NYT story revealed, “Fannie Mae, the nation’s biggest underwriter of home mortgages, had been under increasing pressure from the Clinton administration to expand mortgage loans to low income earners and felt pressure from shareholders to maintain its phenomenal growth in profits.”)
A few years later George W. Bush would continue the policy directive he’d inherited as president and arguably the majority of the damage done would come on his watch — a true bi-partisan political effort.
Long-lasting, Devastating Consequences
The government’s failed plan has wrought long-lasting, negative consequences to millions of Americans, including retirees and near-retirement professionals. According to the American Enterprise Institute, “The interaction of six government policies explains the timing, severity, and global impact of the financial crisis.”
In the end, the policies of big government caused a situation in which millions of people were buying homes they couldn’t afford, in which participants experienced the illusion of prosperity, and in which billions upon billions of dollars went into bad investments. As we all know, the situation was clearly unsustainable, and the housing bubble burst in truly epic fashion — and the rest is history.
Today, tens of millions of Americans cannot find a job or earn a reasonable return on banking deposits because, in the late nineties, a handful of politicians couldn’t help but squander the spoils of decades of peace and prosperity by ignoring and trying to re-write the laws of finance.
Apparently, in their minds, our nation had become so prosperous that everyone should have their own home — even those who couldn’t afford one.
It’s an idea so sophomoric it would be laughable if it weren’t so epically tragic.
The jury may still be out but the evidence certainly seems to suggest our government was at the wheel, steering every aspect of the mortgage crisis from beginning to end — I can think of no other reason why there was never any serious attempt to hold those accountable for the largest, man-made economic crisis in modern times.
This is a big story, and the government would have us all believe they could find no wrongdoing, no fraud, and no one guilty of any kind of criminal activity. But I think it has far more to do with where any logical investigation or defense from prosecution would lead — right back to Washington D.C.
In other words, the government did it.
With ongoing stories of government malfeasance and collusion, the era of righteous federal regulators looking out for the best interests of their constituency is finally drawing to a close.
Just what you’d expect after decades of inept, incompetent, and perhaps even criminal actions on the part of so many politicians, regulators, and bankers.
These changes — in politics, policymaking and financial regulation — are recasting the very idea of retirement planning in America.
More than ever, you need to take matters in your own hands and entrust your financial future, especially your retirement, to those most adept at reading the big economic trends and providing solutions that best fit your personal and financial situation.
Don’t expect anyone in the Washington hierarchy to do it for you.
The most they’re likely to do during another next financial crisis would be to bail out the banks (again), let the Wall Street culprits go free (again), and pass new legislation that fails to address the root cause of the problems (again) while turning up the financial pressure already being felt by millions of hardworking Americans.