Wednesday, April 22, 2009

What happened. What now.

Commercial and investment banks used their size and money to make campaign contributions that allowed them to evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. One of the first regulations attacked dated from the Great Depression. This was the Glass-Steagall Banking Act, a law designed to separate commercial and industrial banking. Banks, commercial and industrial (the latter known as investment banks) could now combine operations to create products in fundamentally unstable ways.

Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.

Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as “derivatives,” to subprime lending and passed the bundle off as the invisible hand of the free market at work.

How Does This Impact Blacks

Financially, Blacks are worse off now than they were, on average, ten years ago. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices “intentionally assigned black customers subprime mortgages while giving whites better rates.” This lead to higher mortgage loan payments for black versus white borrowers. Given this reality, efforts by media outlets to blame the crisis on minority borrowers reveals a stunning level of racism. This negative campaign further fuels negative race-based resentment that will grow, as the economy continues to weaken, to a very dangerous level.

What to do now

We need to replace the elites that controlled the financial marketplace, both firms and people. This means a blanket prohibition covering the firms that created the crisis, and includes anyone working in a operational or senior level at any failed GSE, bank, insurance company or investment bank/brokerage house.

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