Thursday, October 16, 2008

The death of accountability

I’ve started several postings on the financial meltdown in the past month, but each time concluded that pulling together all the threads would require more time than 3 or 4 IT-related postings — and also be of less interest to readers.

In short form, the problem was that too many people had too much of a stake in easy money. Commercial banks were told to lend to un-creditworthy borrowers under the Community Redevelopment Act, Fannie and Freddie bought these subprime loans to expand their mandates (and thus their size and bonuses), while Wall Street securitized mortgages claiming that risk was avoided by putting lots of junk notes into one basket. To top it off, the Fed (pressured by the Bush Administration) sought to abolish the business cycle by pumping easy money into the economy to avoid the natural recession due after the NASDAQ crash and 9/11.

Some of the damage is temporary. For a few years, 401Ks will be down and unemployment will be up, but eventually the recession will end. People who never owned a house before will go back to renting.

The politicians will also use this as an excuse to increase regulation and meddle with the economy even more. This is far from encouraging, but that topic is worthy of an entire post (perhaps) someday.

What I find really depressing, however, is the utter lack of accountability from people who were directly responsible for the problem. Not the Wall Street types (who lost their jobs), but the perpetual political caste who will lie and distort to protect their incumbency despite their direct culpability.

For almost a decade, a few politicians were arguing that Fannie and Freddie were using their implicit (soon explicit) government guarantees at risk to put trillions of taxpayer dollars at risk. People like Rep. Paul Ryan sponsored bills and held hearings in 2002, 2002, 2003 and 2005 to rein in the GSEs, but Fannie and Freddie’s protectors (their campaign coffers flush with contributions) fought off proper oversight at every turn.

Rep. Barney Frank is well known for constantly saying (as recently as July) that criticism of Fan and Fred was overblown and there was no real problem. But what is truly disturbing is today’s efforts by Sen. Chris Dodd to hold hearings on the Fan/Fred collapse that avoids any discussion on Congressional culpability. As the WSJ put it:

At today's hearing, his mission is to weave a tale that somehow manages to avoid mentioning his own role in this debacle. That won't be easy, but Mr. Dodd has shrewdly selected a series of witnesses who, like him, contributed to the mess, and have every incentive to point fingers elsewhere.
Nazi propagandist developed the concept of The Big Lie, which argues
The English follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous.
So if the politicians who are responsible for this mess not only get re-elected in perpetuity, but also manage to convince the public that others were responsible, then the political caste will have sunk to new lows in accountability. Apparently the press (for whatever reason) is not calling Dodd on his hypocrisy the way they have for various major and minor political sex scandals.

At its core, a free society depends on accountability — moral, legal, economic, political — to function. A breakdown in accountability is a step away from the rule of law towards Russian-style anarchy or oligarchy. I’d hate to think the late 20th century marked the high water mark for freedom and transparency in American society.

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