With the Occupy Wall Street movement that began in mid-September having spread from New York to at least 100 major cities in North America, Europe, and Asia, surely something is afoot. But what? And why?
OWS sympathizer Leo Kapakos, writing for the Examiner.com, declared, “The overriding reason for the OWS movement is the belief that our ‘capitalist’ system in its current form works only for the top 1% of Americans and no longer provides a fair shake for the other 99%.”
He listed three specific complaints:
“1. ‘An unfair tax system’—Corporations are posting record profits but pay little in taxes because they utilize loopholes and tax havens.
“2. No more ‘dirty money and influence peddling in politics’—We have to start addressing the problems of corporate influence in Washington.
“3. No more ‘deregulation’. Banks and financial institutions have become too big to fail largely because of deregulation.”
In this last complaint Kapakos has an ally in Austrian school economist Robert Ekelund, the Catherine and Edward Lowder Eminent Scholar Emeritus at Auburn University, whose expertise includes the economics of regulation.
End of Separation
Ekelund says he opposed much of the banking deregulation that occurred in the 1990s, “especially the repeal of Glass-Steagall” in 1999 and 2000. Glass-Steagall was a 1933 banking law which, among other things, separated investment banks from commercial banks that accept deposits from consumers.
“This created the institutional conditions for an increase in leverage,” Ekelund said. “Wild West banking ensued, granted at the encouragement of Fannie Mae and Freddie Mac,” government-sponsored entities deeply involved in the mortgage market.
Ekelund said eliminating the separation of banking and finance “enabled the construction of the kind of instruments that created so much uncertainty that issuers had to provide insurance against their default.” Then with the collapse, “the average Joe helps bail them out, after which the biggest malfeasors give themselves raises and the banking system hoards trillions in capital.”
Attorney and author Peter J. Wallison, a senior fellow in financial policy studies at the American Enterprise Institute, says he believes the OWS protestors have embraced wrongheaded notions of the causes of the financial collapse and economic recession, which he blames largely on a “credulous” news media. Wallison served on the federal Financial Crisis Inquiry Commission and issued a dissent to its January 2011 report.
“To be as favorable as possible to the media, reporters don’t have the time or the experience to question what they are told by government officials on matters where expertise rather than politics are involved,” Wallison said. “The government told them the private sector and especially Wall Street were involved, and they believed it and propagated it.”
Instead, said Wallison, OWS protestors should blame requirements that forced government agencies and private lenders to steer money into loans for lower-income people. With millions more people of dubious means able to obtain loans, housing prices became inflated until the bubble burst.
The Crisis Inquiry Commission’s majority concluded the crisis was caused by factors including “widespread failures in financial regulation,” “breakdowns in corporate governance,” “an explosive mix of excessive borrowing and risk by households and Wall Street,” “key policy makers ill prepared for the crisis,” and “systemic breaches in accountability and ethics at all levels.”
Wallison said the majority’s report was a foregone conclusion because commission chairman Phil Angelides “started out with the idea that the private sector was not regulated enough, and wouldn’t consider any other ideas or views. The Democratic commissioners let him do whatever he wanted, and the Republicans didn’t have the votes.”
Some of the findings have made their way into the chants of OWS protestors. While disagreeing with the protestors’ overall anti-market tone, Wallison agrees with the attacks on cronyism.
“The original sin was rescuing Bear Stearns” in March 2008, Wallison said, because it sent a message that big financial firms would be rescued. A few months later the government let Lehman Brothers fail, and the apparent flip-flop caused panic to ensue. “If [the Bear Stearns rescue] hadn’t been done we might not have had the freeze-up in lending that was the financial crisis.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of FIRE Policy News.