Rick Sanchez is an incompetent liberal (redundant?) and I’m sick of him parading around his ignorance for the world to see. Specifically, this poor excuse for an anchor, who lived in Miami and was on the air for a long time here, was recently discussing the issue of regulation and the banking industry with Eric Cantor (R-VA), House Minority Whip. Below is the actual video of the exchange:
His analysis of the situation is simplistic, although for his own intellect, this may be as complex as it gets: the cause of the recession was not enough regulation of greedy bankers on Wall Street and the only solution is to regulate them until they cry uncle. Now for a general overview of the real reasons we are in a recession and not this populist, leftist, haves-versus-have-nots drivel:
The reasons that we are in this recession are not simple because they involve many players, many problems that we could have averted and many problems that we could not have averted. It is easy to point the finger at a particular scapegoat and say “it was all their fault,” and we have examples of this: from the right you hear that it was the government’s fault and from the left you hear that it was Wall Street’s fault. The truth lies somewhere in the middle. It starts with government intrusion into the economy which used Fannie Mae, Freddie Mac, and other outlets to increase the ease with which people with less than ideal credit could get homes. This very same government then lowers interest rates and under both the Clinton and Bush administration pushed for expanded home ownership no matter what the cost. The Federal Reserve lent money at preferential rates to government-sponsored enterprises that competed directly with private financial institutions and these government enterprises set out to give mortgages to people who normally would not have qualified for them. Then the Federal Reserve set interest prices low and made lending money easier across the board. Add in the Clinton recession and the 9-11 attacks and the federal government tried to make absolutely sure that the economy would be revived through easy access to money. Most importantly, the federal government, like most other government around the world, have an implicit contract with the big financial institutions: the government would never allow them to fail and these firms knew it, especially the government-sponsored ones.
Then the private sector got more involved. With low interest rates, pressure to give loans to more risky borrowers, and competition from the public sector, private financial institutions started offering adjustable rate mortgages more and more, with artificially low starting interest rates that would shoot up after the initial grace period. The banks and other firms started taking on more risk and leveraging themselves more and more. So what is the logical thing to do if one’s portfolio is more risky? Try to minimize the risk by diversifying, spreading it around, and selling more risky for less risky assets. This became the general practice of these financial institutions and all in all, it was a smart move. What went wrong was the fact that the financial instruments that they created to hedge their risks were so complicated that no one knew how risky they actually were. They bundled high, medium, and low risk assets together and the independent agencies that were supposed to give them an accurate rating failed miserably at understanding them. There were probably those within the firms that originated these financial products that knew that these securities were being overrated, but why would they say anything? Investors around the world, seeing too-good-to-be-true returns on securities that had very high ratings should have been wary of them, but because everyone was doing it, irrational exuberance took over.
Then we swing back to government, which set the conditions for easy money and then, with so many adjustable rate mortgages on the market and with financial firms so leveraged already, the Federal Reserve started to increase interest rates. It was at this point that they noticed that a housing bubble had formed, but any analyst with a degree could clearly have seen that house prices had skyrocketed, not because homes were now made out of pure gold or came equipped with rocket boosters, but rather because of pure speculation. No one acted fast enough, particularly in government, to slow the obvious growth of the housing bubble. The incompetence was across the board. We have the CEO of Freddie Mac testifying that they did not need to increase their capital reserves because investing in houses was “a sure thing.” We have the Democrats in Congress stopping the Bush administration from regulating these government-sponsored enterprises that held the majority of US mortgages because they said that the companies were sound. At the same time, many of these Democrats got sweetheart deals on home purchases made during this time period… but then again, corruption is expected from these clowns. By the time the foreclosures started rolling in, it was too late, it was a bubble created by the state and burst by the state. The second half of this is where Wall Street gets some blame: poor risk management, lack of transparency in describing these new financial instruments, and the buying and selling of these credit derivatives put investors around the country and the world at risk of massive losses if the defaults continued… and continue they did. Voila: Recession.
Now, the ultimate cause of the recession, in my book, was the government and the Federal Reserve. Not one of these events would have occurred without government intervention in the first place; the idealism of having an “ownership society” espoused by Bush and predecessors alike, plus the situation we found ourselves in at the time, and of course government’s insatiable thirst for resources and size all conspired together to set the conditions for the recession. The problem was not that these financial firms were under regulated but rather that the regulations in place were not the right ones and the right regulations that were in place were not successfully implemented (on regulations, I may devote another post to discuss more thoroughly). The problem was not that banks created derivatives upon derivatives, but rather that the way they rated and measured their risk was terrible. If I may be so bold, I believe that we need more of these credit derivatives to help manage risk and the only regulation that we should place on them is to make sure that investors have all the pertinent information about them, i.e. to make them transparent. Yet what I hear out in the world, day after day, is that we need “more regulation,” that Wall Street must be held accountable, and that capitalism has failed us all. This is what politicians and those in power would have you believe, but it is false. While many of the “fat cats,” to use an Obamaism, deserve no love for some of their actions, to cut off our financial industry at the legs in order to satisfy some collective need to hold someone accountable is wrong when the true culprit is the one who has placed the bankers in the gallows. It is the State that has done this and for them to come to us with a scapegoat and a set of penalties for them only does two things: it fools us into thinking that the government itself was just an unwitting victim and it consolidates economic power in the hands of bureaucrats and politicians who should not and cannot run an economy without destroying it for their own political ends. Look at what is being done right now, how the government, instead of focusing on getting people back in their homes, instead of trying to get people back to work, instead of reducing the burden on the everyday man, is engage in more government intervention, more government takeovers, and passing more government spending bills that do nothing but inflate their powers and increase our dependence on them.
Which brings me back the DUI driving, pedestrian-slaying Rick Sanchez who, with absolutely no qualification in economics, mathematics, quantitative risk analysis, or any other related field of study, has the gall to stand before the CNN audience and say that the only solution is to increase regulation and end certain Wall Street practices that he finds offensive. When are we going to realize that these people that are on air know nothing about technical matters and are witting tools in an overt agenda to get people to conform to a line of thinking that would rather have us out in the streets with pitchforks, lynching the haves a-la-French Revolution rather than have us take a good, hard look at the real hand behind all of these events. To the astute thinker these things are worrisome: the State created the conditions for an economic bubble, watched the bubble form, burst the bubble, and in its aftermath engaged in asserting its control over the financial sector, the car industry, the energy industry, and the health care industry, to name a few. At the forefront of this all is a government led by an individual with few credentials, little experience, little courage but a whole lot of charisma who is treated like royalty by the majority of the mainstream media. We cannot let these characters lead us like cattle to the slaughter… we need to be objective, we need to educate ourselves, and we need to realize that we cannot listen to everyone out there with a microphone…