Why Consumers Need Financial Reform

What angers me most about Wall Street's shady dealing and greed is that that they like to blame the national meltdown on their customers. You've heard their sniffy defense: People took mortgages they couldn't afford, lied to lenders about their incomes, and deserve whatever they got. The poor li'l ole mortgage bankers and investors were the innocent victims of shocking consumer misbehavior. The banks had no idea -- absolutely none -- that when the scheduled interest rate ratcheted up on subprime loans, borrowers might not be able to pay.

Now they're claiming to champion consumers' open access to subprime credit by standing foursquare against financial regulation. The li'l ole borrowing and investing public will suffer, they say, if the banks aren't left alone to lend at whatever terms they please.

There's a word for that which I'll abbreviate to "bull." Consumers have suffered plenty under the corrupt, anything-goes financial system that pushed America to the brink. Without stronger regulation, which is up for debate in the Senate this week, Wall Street and the big banks will take taxpayers and consumers to the cleaners all over again.

During the credit bubble, exploitation of consumers made the money machine run. Lenders created mortgages that required no down payment, no proof of income or assets, and no monthly principal repayments. They built big increases in future interest rates into the loans and then sold them to global investors eager for high yields.

Financial Protection Agency on the Way?

The beauty of the system was that the lenders could make money whether the borrowers repaid or not. When the system imploded, thousands of banks went down but their executives generally did fine. It's their trusting subprime borrowers who are defaulting and going broke. Only tighter regulation will stop the financial system from running over their customers again.

Regulation wasn't always the dirty word it is today. From 1940 to 1980, strong financial regulations kept the markets sound. But as memories of the Depression faded, so did the attitude toward controls. Gradually, the post-Depression regulatory structure was stripped away. The resulting deregulated and unregulated institutions have brought us one financial crises after another -- the savings and loan scandal, the bubble and bust in Real Estate Investment Trusts, the collapse of the Long Term Capital Management hedge fund, which threatened to set off a daisy chain of bond defaults, and more. To right the economy, the government -- and often, the taxpayers -- had to get involved.

What works, to keep America stable and prosperous, isn't shoot-'em-out capitalism but regulated capitalism that prevents the plutocrats from seizing the spoils and running the rest of the country into the ground. If you're serious about "no more taxpayer bailouts," you'll support strong financial reform, including a new Consumer Financial Protection Agency. If "no-government-intervention" remains your default response, you're supporting big bankers and future bailouts when the money machine runs wild again.

Don't expect to be thanked by Wall Street or the banks, if you let your Senator water down reform. Consumers are a prey species in the financial world. The mouse might admire the prowess of the vulture but the vulture will eat it just the same.

More on MoneyWatch:
Will Consumer Force Washington to Curb Abusive Lending?
Elizabeth Warren: Why We Need a New Agency to Protect Consumers
How the Goldman Sachs Suit Will Affect Financial Reform
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