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There's an element missing in the sub-prime discussion

COMMENTARY | July 25, 2008

The useful, often vital voice of public interest groups is mostly absent in the debate over the sub-prime crisis, writes Henry M. Banta. He puts some of the blame for that on newsroom cuts in staff, newshole and investigative capability.

By Henry M. Banta

Anyone who did not spend last year in total isolation knows that the sub-prime mortgage crisis has hit middle America very hard, and its bad effects are not over. What has generally gone unnoticed is the failure of public interest organizations to mobilize around the issue. Since Ralph Nader found the Corvair unsafe at any speed, public interest advocates, consumer groups and government watchdogs of all kinds have been an important part of the political landscape. They have made invaluable contributions to the quality of the debate on a host of issues, and provided a vital counterbalance to the lobbying power of “K Street.” But they have been absent from the financial crisis, and that is a serious matter. 

Their absence also reflects poorly on the media. Public interest groups respond to the public’s concerns. If citizens have not understood the crisis, the media must take some blame. This issue is somewhat circular. It is equally true that the absence of the public interest groups affects the way the media can deal with an issue. In these days of personnel cuts in newsrooms across the country the media has lost much of its investigative capacity. Some of the void has been filled by the public interest groups. The list of major news stories they have originated is very long. Their silence about a major economic issue will substantially affect the way the issue is covered and, ultimately, the public’s understanding.

Unfortunately, like so many institutions, the public interest groups have been caught in the sea change that has altered the economy over the last decade.  For all well-established entities, particularly successful ones, rapid change is difficult, and even more so when it requires a basic change of perspective. The increasingly important role of the financial sector has caught them by surprise.   As it grew in size and importance, citizen groups’ attention has been elsewhere. 

The reason is not hard to find. In the past, public interest groups have organized themselves around clearly defined issues involving the power and misconduct of the major industrial corporations: particularly autos, oil and defense. The arcane world of finance was never their thing. Agencies like the Federal Trade Commission, the Consumer Product Safety Commission, and the Food and Drug Administration got regular and effective drubbings. The Federal Reserve, the SEC, even Treasury, rarely got more than a glance.

It is not that the consumer organizations had never dealt with problems created by the credit industry. In 1968 they successfully promoted the enactment of the Truth in Lending Act, and credit card abuse has always been a major concern. But the financial system as such was never a major interest.

The ground has shifted in the last several decades. Not only has the financial sector grown, it has become the largest sector in our economy. In an interview with Bill Moyers, John C. Bogle, the legendary founder of Vanguard, put it better than any mere statistics could:

The financial sector of our economy is the largest profit-making sector in America. Our financial services companies make more money than our energy companies – no mean profitable business in this day and age. Plus, our healthcare companies. They make almost twice as much as our technology companies, twice as much as our manufacturing companies. We’ve become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

Not only has the financial sector grown in size, it has become increasingly complex. Hedge funds, derivatives, commodity pools, credit default swaps, not to mention the globalization of financial markets have left even well informed citizens feeling ignorant and confused. Needless to say, the press has done little to clarify all this for the general public. 

As we have learned, much of what goes on in financial markets goes on out of the sight of and beyond the reach of any regulators. And, as we are also painfully learning, reckless and irresponsible behavior in the financial world can have an immediate and serious impact on the underlying economy.  Worse, what has happened in the sub-prime market may only be a symptom of deeper trouble. An article published by the International Monetary Fund stated, “The mortgage market turbulence is as much about the breakdown of the structure of U.S. financial markets as it is about bad debt.”

The damage done to the underlying economy – the economic world where most of us live – in terms of lost jobs, declining asset values, and lost opportunities – is staggering. It far outweighs the costs of corporate villainy that occupied the attention of the public interest world in previous decades.  We are a long way from being past the worst of the problem.

In the next few years we will face economic questions as complex and difficult as any in our history. For example, the dilemma created by the “too-big-to-fail” problem deserves rigorous examination and vigorous debate. Maybe banks and other financial institutions that make reckless and irresponsible decisions must be bailed out for the sake of the whole financial system, but shouldn’t those individuals who made the decisions suffer the consequences?  The resolution of this problem should not be left in the hands of those who created it.

Recently when Senator Jack Reed, a Rhode Island Democrat, proposed a modest reform of financial regulations, Wall Street interests launched a major lobbying offensive on Capitol Hill. There was no evidence in the media that the public interest forces were even in the game.

In short, we are facing a massive public policy problem. We need the engagement of the “good guys.”  It is not that they are always right; they aren’t. But the essential element that they bring to policy debates is the interest of ordinary citizens. This is a perspective that is different from and detached from the narrow, self-serving views of the people with the direct economic interests, and different from the narrow, self-serving partisan views of most politicians.

The voice and political muscle of the public-interest community are desperately needed.

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