Senator Heller’s Pipe Dream: Fun With Deregulation

Nevada got hammered in the Housing Bubble.   Here’s what the Bubble looked like:

As the Housing Bubble collapsed so did Nevada employment. The graph looks like this:

Nevada lead the nation in home foreclosures for months on end, and it was only in January, 2012 that we were relieved to say “We’re Number Three.” [RGJ]    Why look backward?  Because in this instance the past is prologue. Lessons learned the hard way during the Savings and Loan Crisis of 1986 to 1995 were lost on bankers, builders, pundits, and politicians.

Risky Business

Does this sound familiar?  Deregulation of the Savings and Loans during the 1980’s gave the S&Ls many banking capabilities but without the regulations associated with banking.  Immediately after the deregulation of the Thrifts those that had state charters moved to federal charters because the latter were less restrictive. The states of California and Texas reduced their S&L oversight to match the federal deregulation.  The system rewarded risk. The greater the risk the greater the profits.  That is, the system was profitable until all the risky investments in real estate development started bottoming out.   The dominoes started to topple in 1985 when the Home State Savings Bank of Cincinnati, OH collapsed in March.    From 1986 to 1995 the number of Savings & Loan banks dropped from 3,234 to 1,645; and, the taxpayers were out about $124 billion dollars. [Link]

Deregulation and subsequent “innovation” in the last thirty years have given us the Savings and Loan Crisis (1986-1995), the Dot.Com Bubble from April 1997 to June 2003, [BI] the Enron Debacle and bankruptcy in December 2001, and the Mortgage Meltdown/Credit Crisis of 2008.

One would think we’d have learned something along the way, but here we have Senator Dean Heller (R-NV) touting his platform for economic growth:

“The key to turning our economy around is to remove impediments that have caused economic stagnation and the inability of businesses to create new jobs. Not continue with business as usual.”

“Dean believes that private capital, not the federal government, should be the primary source of mortgage financing for the housing market. Dean supports financial regulatory reforms that stop taxpayer-funded bailouts and address the growing liabilities of Fannie Mae and Freddie Mac.”

And, what might those impediments be? Might they be the Sarbanes-Oxley Act requiring accounting reforms and greater transparency in the wake of the Enron Debacle?  Might they be the provisions of the Dodd Frank Act, the most recent attempt to restrain some of the excesses of Wall Street during the Housing Bubble?  It’s well known Senator Heller joins his ultra-right wing cohort Senator Jim DeMint (R-SC) in proposing the repeal of the Dodd Frank Act.

Dean supports financial regulatory reforms that stop taxpayer-funded bailouts and address the growing liabilities of Fannie Mae and Freddie Mac.”  What would those “reforms” be?  If you want to stop taxpayer funded bailouts of the banking sector, simply leave the Dodd Frank Act in place since it provides for an Orderly Liquidation Authority to wind down the next Lehman Brothers mess.   No one’s all that pleased with the mortgage twins BUT if they are put out of business, WHO picks up the action in the secondary mortgage market?  JPMorganChase? Barclays Capital?

The growing liabilities of Fannie Mae?  That might have been true in 2009 but it’s outdated information now. There’s home-made chart for that:

Data from Fannie Mae, Funding Summary and Debt Outstanding, PDF.

How about Freddie Mac? Again, Senator Heller’s talking points are behind the curve.  Here’s the portion of the presentation made by Freddie Mac to its investors in June 2012 (pdf) —

A bit of Fannie and Freddie bashing is always welcome in some financial sector circles, and usually gets some applause from stump speech audiences who don’t know any better, but trying to sell the idea that we can get out from under the risky business of deregulation, and increase economic growth by dismantling the regulatory frameworks enacted to at least prevent the financial sector from repeating its recent atrocious mistakes is a pipe dream of the first water.

Senator Heller is using the  message from the Frank Luntz GOP talking point memo on financial regulation, complete with the framing: “Public outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day,” Luntz wrote. “Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout.” (emphasis added)

Unfortunately, the facts and actual provisions don’t match the linkage.  New regulations seek to PREVENT the necessity of any more major bailouts by establishing the Orderly Liquidation Authority, but if Senator Heller can string “financial reform” + “bailout” into a single sentence, and then repeat the mis-characterization often enough,  then maybe someone who doesn’t know any better will believe him.

In short: If you liked the Savings and Loan Crisis, enjoyed the Dot.com Bubble bursting, cheered for Team Enron, and loved the Housing Bubble and Mortgage Meltdown…  Senator Heller is your kind of candidate!

Relevant Previous Posts: “Nibbling Away at Sarbanes Oxley,” DB March 26, 2012. “Deregulation Debacle,” DB June 27, 2012. “A good reason not to repeal Dodd Frank OLA,” DB October 22, 2011. “Full Tilt Boogie: GOP attempts to gut Dodd Frank,” DB November 7, 2012.

See also: “Investor Presentation, Freddie Mac” June 2012. (pdf)  Sam Stein, “Frank Luntz Pens memo to kill Financial Reform,” Huffington Post, April 3, 2010.

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