Prevent the Next Meltdown

The federal bailout of Citigroup, including a stake of $45 billion in cash injection for shares and up to $250 billion in loss guarantees, is but the latest manifestation of a shocking abnegation of responsibility. Between them, Thomas Friedman and Paul Krugman encapsulate our financial and recessionary situation to a tee. Three-time Pulitzer Prize winner Friedman reminds us how we came to this state of affairs and Nobel economist Krugman reminds us how to prevent a recurrence.

Writing on November 26, Friedman diagnoses the root of the problem. In his piece "All Fall Down" Friedman reminds us it was not just the bankers who caused the financial meltdown. It "involved a broad national breakdown in personal responsibility, government regulation and financial ethics." The heart of his summation is telling:

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling these loans into securities and selling them to third parties as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Friedman's column is well worth reading. He introduces astonishing examples such as a Bakersfield "strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000." And why not? The builder sold a home, the person who sold the house made a commission, as did the one who wrote the loan, the regulator who assessed the prospects as A-plus and then the outfit that bundled it together with other loans to sell in bulk to other financial institutions. It was nothing but a giant pyramid scheme.

Krugman squares the other end of the equation in his piece on November 28, "Lest We Forget." In it, Krugman begs us not to get so caught up in the details of extricating ourselves from the current mess that we neglect the stringent regulation that will be necessary to keep another such catastrophe from happening again. He reminds us that the banking industry is rather strictly regulated but that the derivative swaps that perpetrated this rot are not. This is what he refers to as the "shadow banking system," the one that Alan Greenspan, Phil Gramm and Robert Rubin insisted was somehow immune to human fallibility and could not be restrained by annoying rules requiring sane and sustainable practices.

Congress and the new president should heed Krugmann's conclusion: "So here's my plea: even though the incoming administration's agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now."