Failure to learn recent lessons

Four (4) years ago, I wrote the following in a column: “Government regulation is a political football. Modern Conservatives argue that regulations are job-killers, especially in a limping economy, and that the free market takes care of inefficiencies. Progressives argue that government is a necessary referee in the free market, making sure that all businesses play fairly and obey basic public safety rules.” Unsurprisingly, we are still stuck with this partisan split, ignoring what is “right” for the public.

What prompted this comment was a study published by the Center for Environmental Health, called “Playing on Poisons: Children’s Furniture Found with Harmful Flame Retardant Chemicals.” It found that children’s furniture, purchased from all the major retailers, from Walmart to Toys R Us/Babies R Us, contained chemicals that have:

. . ..harmful impacts on our bodies’ natural hormones. Other chemicals found in the products include a flame retardant known to cause cancer and chemicals linked to infertility, genetic damage, and developmental health problems. Children are more highly exposed to flame retardants and are more vulnerable to these health hazards than adults.

California was in the process of outright banning retardants in children’s products (in part because they don’t work).

This was example of a need for regulation. In this same column, I observed regulation can also be overly burdensome. At the time, my poster-child for this observation was a bacterial meningitis outbreak at Princeton University. For this specific strain, there were no vaccines currently available in the United States, and the Centers for Disease Control (CDC) asked the FDA for permission to vaccinate students and personnel with a vaccine approved in Europe, but not here.

This happened, the rules were relaxed for this emergency, and Princeton students received inoculations.

This brings me to the latest “bright idea” of conservatives – taking the shackles off of the banking industry imposed as a result of the “Great Recession.” We just got through seeing what happens when we let the financial industry just having to worry about money and how the rest of us suffer.

We have, apparently, failed to learn the lessons of the recent past that we government to serve as an honest watchdog. The latest is a financial “bomb” waiting to go off because of shady machinations in the subprime car loan lending industry, mirroring what happened how the mortgage industry crashed the economy. Lenders do the same as they did with houses – they give loans to unsophisticated people to buy a car, who have no business qualifying for a car loan, with obscene rates and fees.

Inevitably, the buyer defaults on the loan. This can happen for a number of reasons. Maybe, the purchaser was simply spending above their means (particularly given the financial stress of subprime terms. Maybe, a used car just “blows up” and is mechanically dead. The leaves the owner with no car and a barely affordable loan owed on it (which includes paying for future interest).

The lender repossesses the car, sells it to recoup some of the loss, and holds the buyer responsible for entire unpaid loan per the contract (including interest), and with no credit for the “sale” of the repossessed vehicle. If the buyer has a job, the judgment is used to garnish wages and the already economically vulnerable buyer has no car and less money to live on (because of the garnishment). Most such buyers can’t afford to higher a lawyer to find the lender and judgments maybe granted without a fair hearing.

This creates all kinds of problems for the rest of us. First, the poor sap punished with the obscene rates and fees might find himself or herself turning to government aid to make ends meet. This means that us taxpayers are funding the pernicious activities of lenders, preying on the economically marginalized, desperate to own a car for basic necessities.

Second, these loans are bundled, just like the mortgage loans from the Great Recession, and sold as speculative packages to a third party. This creates a market for “bad debt.” This is the same thing that happened with subprime mortgage lending. The ultimate holder of the bad debt depends on someone in desperate financial straits to pay his debt. If the debt remains unpaid (and auto lending is at $1.1 trillion (!), in the U.S., and climbing), the purchase of the bad debt now becomes a bad investment, and we are thrust into another debt crisis, just like of what we just got through climbing out.

While this crisis keeps closing in on an explosion, Congress is voting to repeal Dodd-Frank legislation, passed in 2008, to protect us from the avarice of the financial industry, and replace it with something dubbed the “Financial Choice Act.” Included, in this bill, are provisions to neuter the Consumer Financial Protection Bureau, which is designed to protect us individual consumers from being run over by large financial institutions. Financial lobbyists are flooding Washington to push this deregulatory law towards completion.

Meanwhile, there are no lobbyists on behalf of subprime car loan borrowers, flooding Washington to push from protection from a no-man’s financial land. If we end up in another financial crisis, we will learn again that regulation is not always a dirty word.

Local attorney Jim Rockefeller owns the Rockefeller Law Center and is a former Houston Co. Chief Assistant District Attorney, and a former Miami Prosecutor. Visit www.rockefellerlawcenter.com to submit confidential legal questions, and to review former articles and Frequently Asked Questions.

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