Boondoggle in Progress?

When the sad story is written about how America got into its latest economic mess, and some accounts have already helped shed some light on it, a common denominator will be how government interference in the private economy helped bring it about.

That’s why I take no comfort in the fact that U.S. Senator Christopher Dodd, who contributed to the last meltdown with his refusal to reform Fannie Mae and Freddy Mac, the government’s massively mismanaged mortgage arms, is taking the lead in preventing the next one. Lord help us.

The Senator is on his way out of Congress in part because of his role in this calamity. He’s so unpopular in Connecticut, he decided to retire rather than face the voters this fall. Maybe the fact that he’s no longer accountable to the electorate is not such a good thing, for he has produced a bill that may have some redeeming features, but if we’re asleep, it may also set the stage for more financial irritation.

My cynical shell has become even more hardened after reading Peter Schweizer’s “Architects of Ruin,” which chronicles how housing activists and politicians pressured banks, via protests and legislation, into making ill-advised home loans. Fashioning themselves as modern day Robin Hoods — John Dillinger would have been more appropriate — they had some very powerful, politically correct leverage in framing the issue as rich bankers versus the poor.

There was only one flaw in their calculus: those really were the savings and checking and small business accounts of middle class people they were putting at risk to conduct social engineering. It’s not the top 5% of bank depositors that we should be concerned about, it’s the lower to middle 50% or 60% who can’t afford to have their bank close or default.

Wall Street banks and investment houses, some of them part of the revolving door between government and the financial sector, got into the act. They made out like bandits by helping to finance more home than people could afford; but instead of suffering the consequences when home values tumbled and those loans became “toxic assets,” they got bailed out. Millions of Americans lost their jobs in the carnage that followed.

Which brings me to the question of whether we should trust Dodd or anyone else in today’s political class to get this right. Dodd’s career is close to an end because he got special mortgages from Countrywide Financial, now Bank of America Home Loans, a favor that saved him thousands of dollars. Worse yet, he consistently looked the other way on Fannie and Freddie despite ample evidence that they were financial train wrecks. Yet another bailout ensued.

Now he apparently wants to make amends by ending “too big to fail.” Well, fine, but how about recognizing “too corrupt to govern?”

Some parts of his bill sound sanguine enough. It would establish an oversight council to watch for potential threats, create a mechanism to shut down failing firms, and regulate the complex derivatives that helped pour gasoline on our financial fire. The good news is that an actual bankruptcy process would replace the bailout culture, forcing financiers to suffer for their screw ups.

If that’s truly the case, Hallelujah!

The biggest problem I see is the way the bill politicizes the Federal Reserve by giving the President the power to appoint the New York Fed president (at the moment, reserve-bank presidents are chosen by their boards and directors). Normally, I’m all for chief executives appointing the heads of government agencies, but after the government meddling we’ve just witnessed, the potential for mischief is very real.

Adding to my discomfort is the fact that U.S. Rep. Barney Frank, who was Dodd’s partner in Fannie and Freddie crime, has written a financial reform bill in the House.

These are the men who are supposed to inspire confidence? Perhaps we should put the nation on boondoggle alert.

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