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What happened to the R word?

Fri, Feb 29th, 2008
Posted in Commentary

What happened to the R word? You know, that old fashioned word called Regulation. Government regulation to be specific. With the sub-prime mortgage crisis and it's shady lenders about to put us into a recession for the second time in 20 years, isn't it time we revisit the idea that government regulate lending institutions?

I realize it's fashionable to think that government is bad and anything private sector is good. Unfortunately the reality is that after we taxpayers take the hit on this round of malfeasance and larceny it might do us good to look at how we may avoid taking it in the shorts a third time.

A third time you say?

Yes, this "crisis" is the second "crisis" in lending. Remember the Savings and Loan Crisis of the 1980's and 90's? That little debacle was caused by the government deregulating the Savings and Loan industry and of course they immediately went out and lent far more money than was prudent, and to risky ventures in the real estate market.

According to L. William Seidman, former chairman of the FDIC, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending."

Now doesn't that sound familiar? The Savings and Loan crisis cost taxpayers 124.6 billion dollars in direct government payout sand led to the recession of 1990 - 1991.

It seems quite evident that the finance industry either is incompetent or so greedy that they are unable to use sound judgment. My guess is that they were betting on getting bailed out all along. The sub-prime mortgage industry certainly remembers the S&L crisis and the government bail out and how the managers and lenders walked away leaving the taxpayers to foot the bill.

We, of course, will pay for this one too.

Our current Administration and the Federal Reserve were warned many times that questionable lending practices could spiral the economy down the tubes. They did nothing.

Their solution? Let the economy slip into recession and then send us all a check that our grandchildren will have to pay for.

The irony here is that those of us who have made sound financial decisions will pay for those who haven't and those who made fortunes taking advantage of them. Remember that subprime lenders made $540 billion in mortgages in 2004 and peaked at $625 billion in 2006. Somebody went home with a bunch of cabbage!

As for me I'm a little tired of this old game.

Isn't it time we look at regulating this industry so it doesn't continue to cost all of us billions of dollars in the future?

Kevin Kelleher lives in Houston, Minnesota.

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