A teacher of mine once said, “U.S. history can be taught simply by analyzing the economy during each time period.” From the laissez-faire attitude of the late 1800s to the trust-busting of the Roosevelt and Taft administrations of the early 1900s, every single historical event, politician, and governmental action have been shaped by the domestic and global economy.
Let’s transport back to the late 1800s. Cities are straining to handle an influx of immigration; infrastructure can’t keep up. There’s a lack of sanitation, streets are filled with garbage, and sewers are soiled. Families are living in tenements with small rooms containing little ventilation and abhorrent conditions all around. More notable than these newly developed urban city centers is the vast economy that enveloped them.
The 1900s gave rise to Henry Ford, Andrew Carnegie, Andrew Mellon, and John D. Rockefeller. These are some of the wealthiest men to ever have lived, with Malcolm Gladwell placing them ahead of Queen Cleopatra and William II of England in amassed wealth. Few can argue that these men were wholly ethical, however.
As The New York Times noted in his 1937 obituary, “[Rockefeller] was accused of crushing out competition, getting rich on rebates from railroads, bribing men to spy on competing companies, of making secret agreements, of coercing rivals to join the Standard Oil Company under threat of being forced out of business, building up enormous fortunes on the ruins of other men, and so on.” With no regulation of trusts and large companies at Standard Oil’s conception, it quickly grew to hold ninety percent of the United States’ refineries and pipelines. Then came the Sherman Antitrust Act (which was, ironically, used to bust up unions more so than large trusts like Standard Oil) and the Clayton Antitrust Act.
A New Era for U.S. Economics
These two pieces of legislation represent a marked shift in U.S. economic policy. No longer were we a free market economy but a regulated capitalist system. And this wasn’t such a bad thing: it stopped predatory pricing, unfair competition, and harmful mergers. However, as we have moved into the late twentieth and twenty-first century, a new type of economy has emerged, one shaped by crony capitalism. Just the name of it sounds undesirable.
No more prevalent was this economic system than in the financial crisis of 2008. As Jay Richards noted, about two-thirds of the ‘risky home loans’ were owned by government entities or those operating under government control. It has been said that deregulation led to this crisis, but in fact it is the government’s interpersonal involvement, in which it played the ‘favorites’ card, that led to the crisis that left all Americans reeling. The housing market crash of 2008 was nothing like the trusts of the 1800s singularly because the public sector was now the problem.
The Key to Pandora’s Box…
The key to this pandora’s box of crony capitalism was corruption and conflicts of interest. For example, Herb Sandler, who Time listed as one of twenty-five people to blame for the crisis, created the ARM loan, or adjustable rate mortgage loan. Fortunately for the Sandlers, they sold their company, Golden West, to Wachovia for $24-plus billion in 2006, escaping the imminent housing debacle.
When Sandler appeared before the Financial Crisis Inquiry Commission, it seemed as though the committee went out of its way to preserve his image. The committee’s chairman, Phil Angelides, had received support from the Sandlers as California’s State Treasurer. Mr. Angelides also funneled money from state-managed pensions into private businesses involved in underserved areas and “affordable housing.”
Unlike judges and justices of the courts, politicians often refuse to recuse themselves from matters in which they have significant interest or conflicts therein. This is extremely concerning behavior that may well foster an additional financial crisis in the future.
The Government is The Big Problem
Moreover, let’s take a look at the CRA, an infamous piece of legislation that encouraged lax lending practices by banks. The CRA, or Community Reinvestment Act, was a piece of 1970s legislation that “intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.” John Carney, who initially opposed calls to blame the CRA and labeled attacks as Republican rhetoric, changed his mind on the matter.
At Business Insider, he explained how 1990s regulators started holding banks accountable in more ways. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 placed CRA standards as its center, meaning acquisitions became more difficult. Moreover, in 1995, government regulators began to focus on performance evaluations as opposed to the process of bank lending. All of these culminated in more CRA loans for many banks. In addition, the CRA engendered “No Money Down” mortgages across the board, a dangerous gaffe that spelled disaster in the years to come.
The current economic status quo can be explained by a high school freshman’s biology terms. The relationship between government regulators and self-interested bank and credit owners can be described as mutualism, in which both ‘organisms’ benefit. The relationship between the government and the people can be described as parasitism, in which one organism gains while the other loses. The Competitive Enterprise Institute illustrates the leeching of the economy by the U.S. Federal Government in its latest edition of “Ten Thousand Commandments,” stating, “If U.S. federal regulation was a country, it would be the world’s 10th largest economy, ranking behind Russia and ahead of India.”
The cohesive whole of a few self-interested private business owners and a plethora of government regulators and politicians mean that the next financial disaster could be right under our noses, and we may not even know it. Until trust and honesty are restored in government and boardrooms, we must remain suspicious of and vigilant about our economic well-being.
It’s time for a focus on common sense regulation in which private losses are minimized and consumer protection is maximized. We have seen that the government is a far more potent beast than the private sector. We can no longer allow a simpatico relationship amongst our nation’s wealthiest elite and publicly powerful figures; no longer can we allow freshman biology terms to describe our most sacred – and our most disdainful – relationships.