Opinion: Obama's Financial Rules Make Total Sense

(April 22) -- The sad truth: The current recession was not caused by mistakes in monetary policy by the Federal Reserve, which is usually how recessions are caused. The Fed's monetary policy was sensible from the beginnings of the century until now and still is.

The recession was not caused by homeowners in Modesto and Riverside buying bigger homes than they could afford, then defaulting on their mortgages. That was and is a painful event for all concerned, but the magnitudes of loss are nowhere near enough to have caused this recession.

This cruel Great Recession was caused first and foremost by catastrophically wrongheaded, risky behavior by immense Wall Street banks. They, in a nutshell, made stupendously large bets on how the mortgage business would go, bets 10, 20, maybe 50 times larger than the actual amounts of money involved in the real cash mortgages.

These bets were so large that when they had to be paid off, they put Wall Street into cardiac arrest. The sums needed to pay off the debts turned out to be totally beyond what the banks had available.

It was as if a middle-class person walked into a casino, gave a bad check for a million dollars to the casino cashier, got a million bucks' worth of chips, gambled, lost the chips and then the casino came looking for him for the money to make good on the check.

Some of the banks did not have the money on their losing bets, while some had been on the winning side of the bets. The ones that lost and did not have the money to pay off went into mergers with other banks. Or, in the case of the biggest bank failure in human history -- that of Lehman Brothers -- the government allowed them to simply go into bankruptcy.

This failure and the near-death experiences of the other entities were like electroshock. Banks refused to lend and hoarded cash. Businesses became terrified and laid off workers and shelved expansion plans. Consumers were scared and would not spend.

The economy went into a tailspin. The government realized it had made a colossal error with Lehman and started bailing out everyone in sight. As every economist worth his salt already knew, the way to have another Great Depression is to allow big banks to fail. Ben Bernanke would not let the government make the same mistake twice.

So we got the depressing sight of the government, which means you and me, fellow taxpayers, paying hundreds of billions to bail out banks that had made wildly dangerous and antisocial maneuvers that had plunged the nation into recession -- while paying their executives on a scale that most Americans cannot imagine.

We now learn from the recent Securities and Exchange Commission complaint against investment bank/financial wheeler-dealer giant Goldman Sachs that at least some of the deals these banks allegedly made were rigged fraudulently -- against the bank's own clients.

President Barack Obama's financial reform legislation would, in a modest way, restrain banks from making such wild and unregulated wagers as were done leading up to the 2007-09 meltdown. It would allow some scrutiny of what the banks -- the ones we just bailed out -- are doing, and would standardize reporting of such bets.

To me, this makes total good sense. It will cut into the profits of the banks that make winning wagers (possibly rigged). But it will prevent the kinds of catastrophically huge losses that led to the recession and the bailouts.

If Americans still want to wager, they can go to Las Vegas, and they will not be bailed out if they lose. But if banks expect the taxpayers to bail them out, if bankers' gambles have gotten so immense that they imperil the nation's health, banks need to be regulated more than they have been.

It is our country and our money and our sleepless nights they are playing with.

Think regulating small children playing with matches next to a gasoline can in the basement, and you have the idea.

Ben Stein is an economist, lawyer, actor, comedian, public speaker and university teacher, and he was a speechwriter for Presidents Richard Nixon and Gerald Ford. He has also written several books, the latest of which is "The Little Book of Bulletproof Investing," written with Phil DeMuth.

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