Thursday, October 14, 2010

Chapter 8 of Toomey's Road to Prosperity

Partial review of The Road to Prosperity: How to Grow Our Economy and Revive the American Dream, by Patrick J. Toomey and Nachama Soloveichik. NY: Wiley, 2009.

A few years ago I wrote a lengthy multi-part review of Rick Santorum’s book. I’d like to do something similar for Toomey’s Road to Prosperity. Each post will discuss one or more chapters of the book with a post at the end with a linked list of all the entries and some final thoughts.

Chapter 8 is “The Crash of 2008” (173 – 194).

Toomey things the financial in the fall of 2008 was caused by failed monetary policy. He sums it up on p. 174:

Certainly, there were greedy investment bankers, imprudent underwriters, and irresponsible home buyers. Greed, imprudence, and irresponsibility – to varying degrees – are permanent character traits of our species. But we do not have permanent crashes. When governments play their appropriate role – provide protection for property rights, the rule of law, and sound money, and interfere minimally in economic choices – markets tend to punish these vices and reward the virtues of hard work, thrift, and responsibility. When governments fail at these functions, havoc reigns.

Really? Seriously? The market punishes greed? This is news to me.

In the “monetary policy” section he lays blame at the feed of the Fed, whom he thinks kept the interest rate too low too long. In the next section to takes Alan Greespan to task.

Then he moves on the legislation and regulation that contributed to the crash. the first is the Community Regulation Act. He dismisses it with this logic:
The legislation was motivated by a concern that banks might discriminate against people on the basis of race or low income. The legislators responsible for the act were evidently unaware that the profit motive was sufficient to induce banks to provide their services wherever they could do so profitably. (182)

From this I take it that Mr. Toomey is unaware of any circumstances under which banks might refurse to loan to qualified people based on their skin color or where they live. Perhaps he has never heard of redlining.

Next up are Fannie Mae and Freddie Mac. Among the charges he makes is that Fannie and Freddie made campaign contributions to members of Congress who, in return, fought efforts to put tougher regulations in place. (Toomey himself has received significant donations from the financial services industry.)

The third item on his list is “mark to market.” This is an accounting principle and one that I have only a loose grasp of. It would be better if you read this section yourself.

Fourth on the list are Henry Paulson and Ben Bernanke Toomey blames then for undervaluing Bear Stearns stock when it was forced to sell out to J P Morgan, and for letting Lehman Brothers go under. He also blames them for TARP.

In summation, Toomey thinks the crash of 2008 was caused by government policies.

No comments: