Picture the scene: a mechanic at a car factory is working on the production line. He manufactures the frame of the car to a high degree of accuracy. The mechanic’s role within the factory is one of the most central roles, and if his job is not being done correctly every other part of the car will not fit and the car will be totally dysfunctional. After work, he goes drinking with his friends as he does every day, at the bar owned by the factory. He has a few pints (as much as he can afford), sleeps it off and goes to work again in the morning. He is proud of his work and always tries to perform to the best of his abilities.
One day he goes to the bar, and the barman, under the manager’s instruction, tells him that from now on all of his alcohol is so cheap it’s almost free. On top of this, his manager tells him to do his job twice as fast and not to worry about the quality of work he’ll be doing. The result of these changes is exactly what you would expect: the worker, being given access to cheap alcohol, starts to drink more. His capacity to consume beers is no longer limited by his pay check. On top of this, the quality of the frames he produces is decreasing. The mistakes are not being noticed until the car is being assembled, at the very end of the process, at which point the entire factory grinds to a halt until the mistakes can be rectified.
What should the manager do to get the factory producing quality cars again? It’s obvious that he should repeal his order to lower quality and try and raise the price of alcohol in order to limit the mechanic’s consumption. Why then does he lower the price of alcohol still? And on top of this why does he give the mechanic loads of paperwork to ensure he isn’t deliberately sabotaging the company?
Anyone would look at this situation and say that the mechanic is the victim of factory rules, not that it was his fault that the factory has stopped functioning. In this (slightly forced) analogy the factory is the economy, the manager is the government, the bar is the central bank and the mechanic is the banking sector. To add to this, the price of alcohol is the interest rate and the paper work is regulatory compliance.
It is extremely strange to see that the banks are being blamed for what has essentially been a failure of government. More specifically the US government, since this is where the crisis originated. The common argument I observe goes along these lines “neoliberal free market economics caused the financial crisis and we just need more regulation”, or even that “the banks were preying on poor people and minorities and giving out bad loans at the recipient’s expense.”
However, that’s simply not true. Yes, Wall Street had relaxed their lending standards and started making bad loans. But this was not caused by deregulation, it was a combination of bad monetary policy and governmental economic policies. Low interest rates gave the banks more money than they should ever have had at low prices, thanks to Alan Greenspan and Ben Bernanke. The Community Reinvestment act of 1977 (which was given enforcement teeth under President Clinton) forced the banks to make loans to riskier and riskier borrowers, and this was exacerbated by the quasi-public Fannie Mae and Freddie Mac creating a demand for bad loans to fill their quotas.
Furthermore, what you are never told is that over 75% of subprime loans were on the books of government agencies like the FNMA and the FMCC. People also like to blame the (partial) repeal of the Glass-Steagall regulation, which just allowed investment and commercial banks to be held by the same parent company. We witnessed that banks that were only commercial, and banks which were only investment, failed in 2008/2009, regardless of whether they were held by the same parent company. Contrary to the popular narrative, commercial banks were always allowed to deal in and hold mortgage securities. If you think that the bankers were to blame and that deregulation caused the crisis, I suspect that you were sucked into the “Big Short” Hollywood liberal narrative. I can’t tell you how many people I have met that have suddenly become economists after watching that film!
The problem with saying that banks and brokers were predatory lenders is that there is no data to support the claim. This does not even begin to mention the fact that this exonerates the borrowers of any wrongdoing. Peter J. Wallison, an economist who worked on the bipartisan Financial Crisis Inquiry Commission stated “one of the things I asked is that, well you know, there’s been a lot of talk about predatory lending causing this problem; let’s have some numbers on this. Why don’t you find out how much of these loans were predatory? And of course, they couldn’t find out.” He goes on to say “The answer really is that there was much more predatory borrowing going on than predatory lending. More people were taking out loans that they knew they couldn’t afford, because they were so cheap.”
In a time when liberals are trying to push more and more destructive regulation to compliment the already devastating Dodd-Frank Act, responsible (in addition to the Obama stimulus package) for the sluggish recovery we have seen since the crisis, it’s important to remember that they’re trying to fix a problem caused by bad laws already on the books, not a natural market occurrence.