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Little did people know that banking and finance had contracted a nasty disease — one known in the grifter trade as a Ponzi Scheme — in which sub-prime mortgages were securitized and traded based on an unsustainable promise to pay high returns to investors from monies obtained from subsequent investors.
Baltimore – Newsroom Magazine contributor George Manev is an economist with a distinctly world view. Over the last two years we have shared a lively discussion about the immense similarities and embarrassing lack of responsible adult management in both the finance and broadcasting sectors. Each of these businesses have deep roots in American history, culture and commerce. So have they proud histories and well earned reputations for probity, honestly and integrity. But, along with America’s desperate automobile industry, our once mighty steel makers, this nation’s deregulated airlines, broadcasting, telecommunications, public transportation, shipping, natural gas, electric power, and finance industries are in the hands of fast-buck artists. So far, only the first shoe has dropped as banks world wide face collapse for their unregulated over zealous profiteering.
In the rush to profit by loaning money to anyone while ducking the consequences by selling those loans to unsuspecting investors, this nation’s banking industry perpetrated a massive fraud. Mr. Manev was among the first to see the approaching train-wreck. Our discussions caused us to sound the alarm nearly a year ago when the risks inherent in a banking system that had abandoned probity were still largely concealed from the public. Manev and other skeptical economists got it right for the world’s financial system has been publicly outed for having participated in the biggest and most destructive Ponzi Scheme in history.
As the the international banking system reels from being caught behaving like ordinary crooks, one wonders how supposedly responsible adults could get caught up in such a massive Ponzi scheme. As the realities unfold, investors world-wide remain uncertain about their holdings and rightfully distrustful of banks, brokers and markets. For good reason, but there is yet another issue as unknown to the public — the role deregulation of media has played in journalism’s failures to adequately and prominently cover the inherent risks in sub-prime lending and securitized mortgage trading.
To be sure the financial press covered the story, as did most major newspapers. But in a country that prefers to get its news by television, viewers know little until the collapse of Lehman Brothers. For those who wonder why, one need only look to how this nation’s media was turned over to the same irresponsible adults who were running banking and Wall Street.
Governmental regulation can be onerous when indiscriminately applied to businesses that operate entirely in the private sector. But in our national zeal to apply Libertarian principles to any and every business, we made egregious mistakes. Even today, as the financial world is seemingly collapsing around us, there are many other shoes waiting to fall.
The deregulation of banking in this country came nearly 20 years after the deregulation of broadcasting. that flagrantly turned away from productive lending to exploit the higher profit potential offered by securitized mortgages. We were not the first, for there were many economists and journalists who warned of what was coming. Yet what Manev and I shared was an understanding that went beyond economics and into the conditions that kept the misdeeds on Wall Street all but invisible — especially to those who depend on television as their principal source of news.
Newsroom Magazine readers interested in a fuller discussion of banking deregulation and its impact on American banks and insurance companies will find Philip Strahan’s analysis for the Federal Reserve Bank of Saint Louis, published in 2003, fully expository. Few non-economists might find his 120 page summary readable, however.
It was late September two years before the attacks on the World Trade Center. The Dot Com mania was nearing its final frenzy even as worries over what the news networks dubbed the Year Two Thousand problem for the world’s computers loomed ever larger. Down in Washington, where presidential election activity was already underway, one of the last major legislative successes of the Clinton administration was coming to fruition.
At the behest of congressional Republicans, the Clinton administration, including Treasury Secretaries Robert Rubin and his successor Lawrence Summers, had long been considering sweeping deregulation of the nation’s financial system. While the Democrats saw such deregulation as a means of substantially increasing home ownership opportunities for lower income Americans, the Republicans were anxious to dismantle most of the New Deal restrictions and regulations on banking and finance.
At the center of the negotiations was an expanded mission and new powers for Fannie Mae, the nation’s principal underwriter of home mortgages. Longtime Democrat Franklin Raines, who served in both the Carter and Clinton administrations, had just become CEO at Fannie Mae. At this point the story about how this nation chose to ignore the lessons of the financial collapse of 1929 begins to turn very complicated. In part this was due to the vastly different objectives of Democrats and Republicans and in part because the changes being proposed would decimate essentially all of the restrictions on banks and brokerages imposed by Franklin Roosevelt’s New Deal legislative programs.
Fidelity to fact is so central to responsible journalism that it transcends and stands above all other considerations.
Complexity is anathema in today’s broadcast news — which itself had been similarly deregulated during the Reagan Administration’s first term. Given the immense profits that could be made by introducing ever increasing entertainment values and promotional activities, television news was still being dismantled during the Clinton administration. In the doing, television news was turning its focus to lighter stories, shorter segments, more compressed soundbites. Responsible coverage, or in depth coverage of anything not easily promotable for audience metrics, had run its course.
The vast majority of Americans — those who preferred television as their principal source of news and information, had been seduced. The attention of most Americans was focused elsewhere. Everybody was getting rich — or so it seemed that summer. What the nation did not know was that the single most important news and information for them to know was effectively being cloistered. Television news had changed in favor of television star newsreaders, animated graphics, shorter stories, impressive sets, and even longer commercial clusters.
Behind the scenes the networks were continuing to downsize their news gathering operations. These were the new ways in television news. As most Americans were otherwise engaged, the hidden forces in government, lobbyists and other special interests, applied influence, money and other benefits to get things done in Washington. Given effectively no coverage by television news, little did people know that banking and finance had contracted a nasty disease — one known in the grifter trade as a Ponzi Scheme in which sub-prime mortgages were securitized and traded based on an unsustainable promise to pay high returns to investors from monies obtained from subsequent investors.