There are many laissez-faire economists out there, and I sympathize with them. It is a wonderful idea to believe that companies looking out solely for their bottom line can be countered by consumers looking our for number one. I was with this group until the economic crisis, when it became clear that when banks and other brokerage houses went unregulated the consumer would suffer. Many would argue that laissez-faire in this case didn’t work because it wasn’t truly deregulation, just as a lot of communist apologists argue the Soviet Union collapsed because it wasn’t committed enough to Marxist ideals. What shook me to the core the most was former Federal Reserve chairman and economic superman Alan Greenspan’s admission that his fundamental understanding of the capitalist system was flawed—he always believed companies would work in the best interest of their shareholders. Surprise! They don’t. With bonuses, golden parachutes, and economic shell games operated by Ivy League graduates with no qualification other than being Ivy League graduates, companies partook in the orgy of cash without making any concrete plans for the future.
The libertarian ideal is fantastic, and I believe we should strive towards it. Yet in a pluralistic society composed of humans who are far from mental, financial, or racial peers, regulation is a necessity. Libertarianism may function in homogeneous societies where everyone has a similar background, education, and life experiences, but I cannot see a feasible method of implementation for a society as diverse as America.
Case in point is the suit against Wells Fargo currently sitting in a federal court in Baltimore. The City of Baltimore is suing Wells Fargo for discriminatory lending practices, backed up by affidavits from two former loan officers. What does Charm City allege Wells Fargo did? Instead of giving qualified black applicants prime loans, they were switching them to subprime offers that garnered the company tens of thousands more in interest. These aren’t the unqualified buyers many blame for living beyond their means, but rather people who made more than the average American household income. People who would have received a prime loan if they were white. According to the loan officers Wells Fargo employees engaged in the following practices:
Loan officers employed other methods to steer clients into subprime loans, according to the affidavits. Some officers told the underwriting department that their clients, even those with good credit scores, had not wanted to provide income documentation.
Other times, she said, loan officers cut and pasted credit reports from one applicant onto the application of another customer.
“By doing this, the loan flipped from prime to subprime,” Ms. Jacobson said. “But there was no need for that; many of these clients had W2 forms.”
Such dishonesty also encouraged no small amount of racism towards the customers. It also goes without saying the bonuses Wells Fargo offered to employees for making subprime loans encouraged predatory lending.
The libertarian true believer could say that customers who took the cash deserved what they got because they didn’t shop around. What if every business engaged in these lending practices, though, and what if there was not reason behind the discrimination (which is illegal anyway)? The ideal free market is based on complete information, and customers in this case were not only deprived of information, but they were discriminated against with extreme prejudice. This isn’t a transaction in Galt’s Gulch between two self-made millionaires haggling over the cost of cobbler’s services; it is a lopsided transaction between a gigantic corporation and an individual buyer. The playing field will never be level, but regulation can help.
If Wells Fargo did commit the acts alleged, I hope Baltimore can recoup some losses. For me this affair, as well as the current crisis, underscore the need to regulate banks.
-Michael E. van Landingham