Worshippers at Church of Free Market suffer crisis of faith

In this season of spiritual introspection, there are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stock brokers not answering prayers, or returning calls.

For decades, their prophets have preached economic markets function best when left to themselves, unfettered by government regulation or oversight.

Businesses, investors and traditional market forces would self-regulate, self-correct and self-enforce. Oops.

The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.

To hear the humbled apostles for markets free of disclosure and rules begin to mumble about the need for government regulation is extraordinary. Still-tender bruises from a battered 401(k) make it hurt to laugh out loud.

Chief among the apostates is former Federal Reserve Chairman Alan Greenspan, who humbly confessed his wonderment at mortgage-lending practices to a congressional committee:

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

He was reminded he had the authority to prevent the lending practices behind the subprime mortgage crisis — was advised to do so — and refused to act. Greenspan is contrite. Millions more are in foreclosure.

Help was available through a 1994 law called the Homeowner Equity Protection Act. The New York Times reports fewer than 1 percent of mortgages were subjected to the restrictions under the law.

Three years ago, a handful of regulators were waving red flags about hedge funds and credit derivatives. Lightly regulated exemptions from most rules, they placed enormous bets — literally — around the planet. Dense and esoteric, these trillion-dollar segments of the markets seemed pretty remote until ordinary mutual funds — yours and mine — began investing in them.

The effects of deregulation and unenforced regulation were cumulative. In 1994, the Financial Accounting Standards Board changed its rule that stock options must be treated as a company expense. We are living with the hyperventilation of executive compensation and inflation of stock values.

A year later, Congress limited the rights of investors to sue, let accounting firms off the hook in fraud cases and fudged reporting practices. In 1999, the repeal of lessons-learned regulations from the Depression fuzzed the lines between retail banking and investment banks.

Every opportunity to push the limit was taken, as allowed or ignored by law. Industry lobbyists on Washington, D.C.'s K Street had their back.

My favorite bit of apostasy revealed itself ever so quietly in a New York Times column by Ben Stein, a lawyer, writer, actor and economist. And cheerleader. For Stein, the resilient economy was always peachy keen!

Two weeks ago, reality set in for Stein. At the back of a column about fear and foolishness, he slipped in a hope that President-elect Barack Obama will put meaningful regulation in place — maybe even repeal the private securities law against suing companies. Oh, and maybe inspire a more vigilant Federal Reserve.

Dare I say, there has been an epiphany. People who understand the complexities and see the connections acknowledge how precarious economic conditions truly are.

Resistance to change usually means things are not bad enough yet. We are there.

Otherwise, we are left with the wisdom of a faux person-in-the-street interview from The Onion's satirical review of the 2008 economy:

"C'mon, I've seen this happen a thousand times. The stock market crashes, and then 20 years and a world war later, everything's fine."

The exclamation point on the arrogance of the times is the refusal by banks to tell regulators and taxpayers where billions in bailout money went.

Consider it a revelation of change to come.

Lance Dickie's column appears regularly on editorial pages of The Times. His e-mail address is ldickie@seattletimes.com; for a podcast Q&A with the author, go to www.seattletimes.com/edcetera