Friday, March 20, 2009

Let's Make a Deal

In news that shouldn't be surprising, the Washington Post reports that Countrywide Financial executives routinely broke company policies to give below-market rate mortgages to those with political connections.
Recipients of special loans included senators and other officials, prominent businessmen, congressional aides, celebrities and journalists, including Sen. Kent Conrad (D-N.D.), Sen. Christopher J. Dodd (D-Conn.), former U.N. ambassador Richard C. Holbrooke, former Fannie Mae chief executive James Johnson, former Department of Housing and Urban Development secretary Alphonso Jackson, Jackson's daughter and others.

The article goes on to quote a Countrywide employee:
I'm usually in favor of settling on the side of the borrower with political influence.

Countrywide, which handled many of the sub prime loans that created the current financial mess, clearly recognized the "benefits" of stroking the politically powerful. It was a case of "you scratch my back, and I'll scratch yours."

Mutually beneficial agreements are not inherently wrong. Indeed, they form the very basis of trade in a free market. In such situations, each party trades one value for another, to the mutual advantage of each party. But in an industry that is highly regulated by the government, such as the financial industry, such trades often involve political favoritism. Countrywide traded below-market mortgages for political favors.

Countrywide was hardly alone. ABC reports that AIG employees continued to make campaign contributions even as the company was going down the toilet and begging for a federal bailout. Among the recipients:
1. Sen. Chris Dodd, D-Conn., $103,100
2. Sen. Barack Obama, D-Ill., $101,332
3. Sen. John McCain, R-Ariz., $59,499
4. Sen. Hillary Clinton, D-N.Y., $35,965
5. Sen. Max Baucus, D-Mont., $24,750
6. Former Gov. Mitt Romney, (R) Pres $20,850
7. Sen. Joe Biden, D-Del., $19,975
8. Rep. John Larson, D-Conn, $19,750

Many pundits--including Rush Limbaugh--are ascribing these shenanigans to a network of the rich and powerful who work in concert to rape and pillage the citizenry. But the fact is, the citizenry has as much, if not more, responsibility for this than the politicians and their donors. It is the citizenry that demands government regulations and oversight of private businesses, and it is this regulatory environment that motivates businesses to cull political favor.

An increasing number of executives are more adept at politics than business. Business success increasingly depends on having the right political connections, and less on developing new products, or having marketing savvy, or any other traditional business skill.

Businessmen who play this game are unprincipled hacks who could never succeed in a free market. They literally sell their soul for the expediency of the moment, while their run their company into the ground. But their political connections "protect" them from the consequences of their incompetency--their political benefactors simply proclaim that the situation is dire and push through a bailout.

These schemes are not limited to the federal level. Indeed, earlier this week I quoted Houston mayoral candidate Gene Locke:

The reality is that to play and influence the outcome you must be eligible to be on the team and unfortunately or fortunately, whatever the deal is, the ability to make a campaign contribution at least gets you suited up for the team.

If a politician openly asked for campaign contributions or special loan rates in exchange for voting a particular way, he would rightly be charged with corruption. But when the Chairman of the Senate Committee on Banking, Housing and Urban Affairs (Chris Dodd) receives such donations and special treatment, it is simply how the "game" is played. When a candidate for mayor in the nation's fourth largest city openly declares that campaign contributions are necessary for him to give your position consideration, it barely makes the news.

The more cynical and unprincipled commentators are railing against the "fat cats" and politically powerful. Many are saying that politicians are ignoring the "will of the people", and they should be replaced with individuals who are more responsive to voters. This will be as effective as replacing pandering, power lusting Democrats with pandering, power lusting Republicans, which is essentially what is being demanded. Fundamentally, the problem is not the people running "the system"; the problem is the "system".

So long as the public believes it proper for government to regulate business, then businessmen will seek to influence those regulations and politicians will enjoy being influenced. It is not an issue of "throwing the bums out", it is an issue of rejecting bad ideas and embracing the idea that individual rights are inviolable. Until that occurs, there will be no shortage influence peddling.

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