There is an unusual television show called “Punked,” in which the actor Ashton Kutcher plays strange practical jokes on other Hollywood types. In watching the Washington and Wall Street drama of the past few weeks it strikes me we are in the process of getting “punked” as a nation. I say this because turning for answers to the people who created the problem is normally the domain of strange thinking or practical jokes.
In times like these, people are genuinely frightened about what comes next, but it is important they not forget Washington was instrumental in getting us here.
We want answers, we want a cure. The problem is that whether in a reality TV show or in real life, we don’t make the best of decisions when gripped by fear. We gravitate toward security, or what we perceive to represent security.
There are a lot of proposals now coming from Washington aimed at making us feel more secure, and over the months ahead there will be many more. It is important we take a deep breath and realize that in financial terms, we leveraged up as a country and we are now going to de-leverage. It will hurt, but let’s not compound it. We need to be very circumspect about the solutions both Republicans and Democrats are offering and look closely at their cost, their unintended consequences, and the ways in which they compliment or degrade the very principals that have been instrumental to the creation of initiative and wealth in this country.
Let me illustrate. Lately on television I’ve heard seemingly unending opinions on what should come next by former congressional colleagues Mr. Dodd and Mr. Frank. With all due respect, I find it flat out unbelievable that Mr. Dodd or Mr. Frank have any credibility in this debate. For more than the last 10 years Mr. Frank’s record was “close to perfect as a stalwart opponent of reforming Fannie Mae and Freddie Mac,” according to the Wall Street Journal.
Over the years a handful of House and Senate members have tried to change Fannie and Freddie, and even current White House hopeful Sen. John McCain tried in 2005 to advance a strong reform bill. A threatened Democratic filibuster killed the bill, and Mr. Dodd refused even holding Congressional hearings on it. Of the $170 million in lobbying efforts and political contributions tied to Fannie, Freddie, and their employees, Mr. Dodd happened to be the top recipient.
The point here is that they resisted reforms that could have been instrumental in avoiding what we are just beginning to go through - and if they didn’t have the answer then, why do they have it now? This is particularly true since they pushed in the opposite direction insisting with others in Congress that Fannie and Freddie and the Department of Housing and Urban Development increase purchases of mortgages, and lending, to low-income borrowers, as well as to people who represent poor credit risks. They insisted on specific targets and quotas irrespective of a borrower’s ability to repay. From the time of the Community Reinvestment Act to present, Washington, rather than pure “market forces,” has driven much of what would come next on housing credit. These effects were heightened by a Fed under a Republican administration that held down rates and thereby let the credit party go unchecked by market forces.
Nonetheless, instead of Washington, some blame greed. As tempting as this might sound it is hardly the new variable in contributing to today’s financial mess. Greed has been, and always will be, with us - whether in Wall Street or in someone buying too much house. Given this constant, the question lies in what people responded to - and in this case the answer lies in incentives born in Washington. People will always respond to incentives offered - that’s why as a country we spend time fighting as we do on Washington’s many proposals. They matter, they have effect.
The irony is that those in Washington offering solutions and casting blame most loudly now are in many cases the same web of policy-makers who had the most bearing on what is unfolding. It’s important we not forget this.
Despite what today’s campaigning populists suggest, this was not a simple failure of capitalism. Its opposite, “crony-capitalism,” is what paid over $100 million to the connected few who ran organizations like Fannie Mae in Washington. Politics drove a big part of what has happened, and as a consequence every one of us needs to be vigilant in making sure neither fear, nor the illusion of security, drives us to accept the newest proposals coming out of Washington. Without careful examination we risk living with consequences that will ultimately prove much more far-reaching than today’s current financial storm - and that would indeed make for a tragic “Punking” of America.
Republican Gov. Mark Sanford of South Carolina is a former congressman. He holds an MBA from the Darden School of Business and formerly worked at Goldman Sachs.