Resolving the economic crisis means addressing a number of complex issues, but it should start with a government investigation of the financial services industry, which so far has not happened despite pressure to do so from the American public, said Pulitzer Prize winning journalist Gretchen Morgenson.
Morgenson made her comments Monday (12/12/11) at Princeton University as part of a lecture series on "Economic Recovery: Perils, Politics and Possibilities.''
''Regulators and legislators are not on the job collecting data they need to amass solid cases,'' Morgenson told the crowd of listeners packed into Dodd’s Auditorium. ''Regulators are refusing to reign in when they should be.’’
During the savings and loan crisis of the 1980's to 1990's, the U.S. Federal Bureau of Investigation (FBI) opened 5,500 cases that resulted in 839 convictions. During the current economic crisis, attributed to complexities involving sub-prime mortgages with far greater severity and impact, no investigations (by the FBI) have started, Morgenson noted.
''I believe a more aggressive mindset could have opened more prosecutions this time around,'' she added. ''Instead there is a relaxed regulatory approach in the current crisis, and there is silence from the highest levels of government. We need to have tough people asking tough questions.’’
The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted in July of 2010, hailed by President Obama for transforming the nation's financial regulatory system, brings consumer needs to the forefront with the creation of the Bureau of Consumer Financial Protection, Morgenson said, but there is still no director for the agency that opened this past summer.
She named loopholes in the bulky legislation that still allows big banks to be rescued while sacrificing smaller community banks, and noted a faulty credit reporting system that gives those banks higher credit ratings (and greater borrowing power) because they can be rescued from insolvency. In addition it is vulnerable to political manipulation through the membership appointment process to agencies within the legislation’s framework. The glaring failure to examine the roles Fannie Mae and Freddie Mac played in the mortgage market debacle say volumes about the government’s failure to adequately address what happened.
''It's a legislative solution,'' said Morgenson that sidesteps responsibility, widens the gap between Washington D.C. and the rest of the population, and fuels their anger.
''It's an unbelievably harrowing period of time,'' said the columnist, assistant business and financial editor at the New York Times who co-authored the book, Reckless Endangerment, with Joshua Rosner. The book explores a trail of corruption between Washington D. C. and Wall Street in the sub-prime mortgage crisis with no price paid by those in leading roles.
''There is so much that we do not know even to this day,’’ she said of the need for investigation. ‘’My job has become something of being an archeologist because I am still digging among the wreckage and trying to put together the puzzle to explain what happened.''
As of last June, current debt to disposable income had dropped to 115 percent, down from 116 percent and an improvement from the record 130 percent recorded in 2007, Morgenson said. In the past during periods of stability, high numbers would range from 58 to 85 percent.
There is still $13.6 trillion owed in mortgages, down from $14 trillion last year, she said. Government and mortgage companies should provide forbearance or forgiveness on second mortgages/property liens to help reduce that figure and speed recovery.
''There is a glacial level of debt resolution reduction,'' she said about the pace of economic recovery.
Consumer debt at $2.5 trillion in credit cards, car loans and consumer loans must be reduced by at least 20 percent to reach sustainable levels in the economy, she added.
''Obviously, we have a long way to go in the deleveraging process,’’ Morgenson said, but ended by saying ‘’we will climb out of this mess. I am a big believer in American ingenuity. If I did not believe that something could be done, then I would not be here.’’
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