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The Rigged Game of the Big Banks

Written By Geoffrey Pike

Posted July 22, 2015

bankdealThree well-known Democrats – Senators Elizabeth Warren and Sherrod Brown and Rep. Maxine Waters – are accusing the Department of Housing and Urban Development (HUD) of purposely changing key requirements to help two major banks.

JPMorgan Chase and Citigroup both entered a guilty plea earlier this year on a felony count related to conspiring to fix foreign currency trades. These two mega banks know how the system operates though, if they themselves are not operating it. They have friends in high places.

Due to the guilty pleas, these two banks should be ineligible to qualify for FHA insurance on their loans, according to the regulations. But this requirement was quietly removed by HUD, thus making JPMorgan and Citi eligible for the taxpayer-backed insurance.

In other words, this is just more cronyism at work. The big banks always get their way in our current system. This should have become obvious to every American after the 2008 bank bailouts.

This really falls on the Obama administration and, of course, HUD itself. The banks obviously have the power to make things happen in their favor.

I give some credit to these three Democratic politicians for exposing this cronyism, especially since it makes the Obama administration look bad, at least for anyone paying attention.

Unfortunately, I am not expecting these three politicians to recognize the real problem, which is too much government in the first place. They will call for reforms. They will call for an end to corruption. They will probably call for more penalties on the banks.

However, it is impossible to end this kind of corruption as long as so much government power exists. As long as there is power to be used, there will be power that is abused.

Free Market Power

There are so many problems with this story, it is hard to know where to begin. It is a reflection of government power and central banking on steroids.

The three Democratic politicians are certainly correct that this is a case of cronyism and corruption, but let’s look at all of the factors involved here.

First, how is HUD able to just rewrite the regulations with barely anyone noticing? We have this system of all of these alphabet soup bureaucratic agencies writing regulations. But these regulations are backed by the force of government. In other words, they are laws. All federal laws are supposed to be passed by Congress and signed into law by the president, unless the Congress has enough votes to override a veto.

The Congress has been delegating its power to write laws for a long time now, but it in no way reflects the Constitution or our system of what is supposed to be representative government.

When HUD changes a rule favoring the big banks, the voters have no recourse in getting rid of the culprits, unless we see some sort of mass movement. And there is little point in counting on your “representatives” to correct the situation. They have already abandoned you by turning over the power to write laws to tens of thousands of bureaucrats with little accountability.

The second problem I see here is that there should be no taxpayer-backed loans or insurance. Isn’t this one of the many contributing factors to the last housing bubble and financial crisis? Why should taxpayers bear the risk for a loan by a bank? Not only is it morally wrong, but it also just encourages risky loan behavior that otherwise wouldn’t occur in a free market.

The third problem is that the Department of Housing and Urban Development shouldn’t exist in the first place. When the 13 original states joined in a confederation, is this really what they had in mind? Is it really the role of the federal government, or any government, to be involved in housing and loan subsidization?

The solution to all of this is simple. We need less government. We don’t need a central bank that acts as a lender of last resort to the mega banks. We don’t need the government to back loans and encourage lending.

Ironically, what the three Democrats are complaining of is really a mess that they created, or at least their kind of mindset created. We only have cronyism because the government has so much power to spend and regulate.

I am not going to hold my breath for these three anti-market politicians to call for the elimination of HUD. If there were no HUD, then this wouldn’t have happened. But these three supposedly radical politicians will call for reform. And then they will be calling for more reform next year and the year after that.

As long as we have agencies like HUD given the power to write laws, there is going to be abuse of power. There is going to be cronyism, and the big banks will continue to thrive.