Wednesday, October 29, 2008

Regulation Q

Do you remember Regulation Q, the Federal Reserve limitation on the maximum interest banks could charge? That was phased out in the 1980s. Or how about the bevy of state usury laws, that set a maximum percentage for interest banks and financial companies could charge their gullible customers, or limits on branch and interstate banking? They were phased out around the same time. And you no doubt remember the Bretton Woods Agreement, that effort to set exchange rates and control international capital flows, that was born in a New Hampshire Hotel in 1944, and died in the 1970s? (And was Harry Dexter White a Communist agent?)

All are gone, gone with the wind, to coin a phrase, blown down during the gale of free marketeering in the 1970s and 1980s. There are many calls these days for new regulations of security markets. The Nightly Business News on PBS sounds increasingly like the editorials in The Nation. But are they really serious? Will it be a mere prohibiting of the worst excesses of our recent capitalist excesses, or a fundamental rethinking of how our economy should work? In particular will there be a serious effort to limit capital flows and interest? The old arguments against regulation will be trotted out—any effort to seriously impede the flow of capital will just create a black market, and with the “return of the repressed” the free market will assert itself with a vengeance. At best, many will suggest, we cannot regulate financial markets as much as we can suggest and insinuate, and offer little helpful hints. I don’t agree. The problems of black markets will never be fully eliminated, but if nations work together, and our securities regulators are vigilant in closing newly emerging loopholes, they can be minimized.

But what is needed is a more fundamental fix to our housing priorities, first by starting again to rebuild affordable rental and limited-equity cooperative housing in sizable quantities, and then by, as much as possible, eliminating speculation from the issuing of home mortgages, and returning them, as much as possible, to the golden age of the 1950s and 1960s, when small banks and savings and loans issued the majority of mortgages. The reasons for this go beyond the economy to basic questions about the nature of democracy in America. Let me quote Ross McKibbin from the latest issue of the London Review of Books (speaking of Britain as much as the US.) “Fundamentally, private housing has become a compensation for the increasingly gross maldistribution of income. Inadequate incomes mean that large numbers of people don’t have access to the style of life that has always been the ultimate justification of neolioberalism and to which, reasonably enough, they now believe they have a right. What it does give them access to (in the short term) us credit.”

But this credit has to be secured by housing prices and this only works if housing prices continue to go up. As McKibbin argues, we have replaced social democracy with credit democracy and universal access to credit—but the right to borrow money is a poor substitute for the right o decent and affordable housing. The speculative genie in the economy can only be put back in the bottle if the free flow of credit is strictly limited for the good of society as a whole, and not a handful of speculators. Life, liberty, and the pursuit of happiness can be earned, it cannot be borrowed.

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