Failing Banks, or a Failing Government?

The financial news for the past several days has been one bombshell after another.

Lehman Brothers, one of the world’s largest investment banks, files for bankruptcy.

Another celebrated investment banking firm, Merrill Lynch, merges with Bank of America to forestall its own financial crisis.

AIG, the nation’s largest insurance company, tetters on the edge of insolvency.

And all this only a week after the government had to bail out Fannie Mae and Freddie Mac, the nation’s two immense, quasi-private mortgage companies, before they failed.

How did this all happen – and where will it all end?

Much of it started with the sub-prime mortgage crisis, and the larger foreclosure crisis – with much of that brought on by lending practices so lax and opportunistic they bordered on a industry-wide criminal conspiracy. This then triggered a crisis in investment firms that used this house of cards to extract ever more money for themselves, combining and recombining (and reselling) suspect loans and debts as “derivatives,” willfully oblivious to the fact that no matter how many times crummy loans are recombined into clever packages, they’re still crummy loans. Similar fanciful transactions have been spreading throughout other parts of the financial system, always with a drive to make ever greater profits, regardless of the risk involved and the fact that none of it added anything of real value to the economy.

In a truly Alice-in-Wonderland turn, AIG even tried to stay afloat recently by loaning itself money. And you thought all this craziness ended with the Enron debacle?

Everyone is now blaming the greed of these various firms and their managers and employees for this crisis. And without question that plays a part. But where, one must ask, has our government been all this time? Isn’t it the job of the government to watch over our markets, to protect investors, to prevent greed from running rampant and gutting our economy?

Well it should be. But our govenrment has spent the past 25+ years dismantling the system of prudent laws and regulations inacted after the Great Depression – starting in 1980, when the Democratic-controlled Congress repealed the federal law against usury, or exorbitant interest rates. It’s been downhill ever since, as our government has essentially turned over the financial henhouse to the foxes.

And how much of this government malfeasance, in turn, can be traced to the millions of dollars in contributions that politicians of both parties have received from the very financial institutions that are now crumbling before our eyes? Whose greed is it that’s truly to blame for this crisis?

The bankruptcy of Lehman Brothers is so far the only case where the government has allowed a firm to fail. In all the other cases, the government has come to the rescue with taxpayer money. While such action might make some sense to preserve our financial system, one also has to ask what it is we’re preserving. For in the current system our government is now struggling to save, immense and unjustifiable profit is privatized, while even larger losses are socialized – with you and me picking up the tab.

Indeed, where does it all end?

While we try to deal with the immediate fallout, one thing is clear. If our financial system is ever to recover, we need to return, and quickly, to the vigorous and vigilantly enforced laws and regulations which used to keep greed in check.

And electing politicians who refuse to take money from the very institutions they are supposed to be watching over would be a great place to start.