Of melamine, markets and mortgages
09/27/2008 12:00 AM
09/27/2008 1:37 PM
So many Americans are focused on whether our government can keep the financial system from swirling down the drain, that they might not have seen this: In China thousands of children are sick, and four are dead, because of contaminated milk.
Those two situations are not unrelated. Both show what can happen without effective regulations.
In China, 54,000 children developed kidney stones or other ailments after consuming milk tainted with melamine, an industrial chemical. Dairy suppliers, trying to cut costs, diluted milk and added melamine because it can fool tests checking for protein.
The tainted milk has spread: On Friday contaminated baby cereal in Hong Kong and wasabi crackers in Japan were reported. European Union officials say they fear bad milk powder is circulating in Europe, in chocolates and toffees.
Our U.S.-grown financial debacle started a decade ago, as people began buying homes with sub-prime mortgages that – it turns out – they couldn't afford. They had plenty of help in this. Government agencies pushed the expansion in homeownership to lower-income families. In Charlotte, city officials happily allowed mile after mile of cheap housing (a.k.a. affordable housing) to obliterate woods and farmland.
Real estate agents were naturally quite eager to help, because, as they keep telling us, owning a suburban home is the American Dream.
Clearly, some homebuyers were irresponsible. But evidence points to plenty of fraud, too. Observer investigations found home appraisals inflated and loan applications falsified. Buyers were lied to about monthly payments.
Foreclosures rose. Property values nose-dived. Pop! There went the bubble.
Lenders, meanwhile, sold the bad mortgages to other finance companies, who sold them again.
The bad loans are now sprinkled through our financial system – like the melamine-tainted milk from China that made its way onto wasabi crackers and baby cereal and toffees.
Neither of those things had to happen. China's product safety net is as full of holes as my 20-year-old jeans. Bribes and corruption easily puncture government regulations.
In the U.S. finance stink pile, part of the problem was that regulators who were supposed to keep the system honest didn't do their jobs. A segment of the mortgage industry – independent brokers – was barely regulated.
Similarly, financiers selling the bad loans had few regulations to reel them in. Starting in the 1980s, the Republican Party began dismantling as many government regulations as they could. By the '90s, seeing how popular Republicans were, plenty of Democrats had caught deregulation fever.
The 1999 Gramm-Leach-Bliley Act – backed by Republicans and Democrats alike – blew apart Depression-era laws separating banks, insurance companies and securities firms. Banks were heavily regulated, but the rest of the finance industry wasn't.
The idea was that without regulation, the marketplace would be more robust. And it was, until …
When people complain that government regulations crimp businesses and hurt investment, they're right. When people say the unfettered marketplace will be more robust than a heavily regulated one, they're right.
But as we've seen, uncrimped businesses and a robust marketplace can devour themselves. And a robust market is not the only value a society should have.
Until the human race perfects itself and roots out greed and corruption, I want someone looking out. I want someone testing to ensure the milk I feed my child isn't full of dangerous chemicals. I want someone making sure people aren't tricked into mortgages they can't afford. I want someone overseeing the people who run Wall Street, someone who won't be afraid to slap down those CEOs when they get overextended.
I've spent years as a journalist watching government regulators either perform with Olympic-sized apathy, or in the other extreme, apply silly rules with a rigid lack of the most elementary common sense. I know government regulation is, even at best, a flawed instrument.
But from what I can see, it beats the alternative: Letting the whole economy fall into a shambles. And letting babies die from tainted milk.
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