I’ve been absolutely fascinated in recent days to learn about the history of the mess we find ourselves in.
Here it is in a nutshell. In 1933, in the the throes of the Great Depression, President Franklin Roosevelt and Congress recognized that one of the abuses that led to the mess the country and the banking system was in then was the fact that banks who were in the investment business (which is inherently risky) were not separated from banks that receive deposits (which should be heavily regulated with a view to safety). So two Democratic Congressmen sponsored — and Congress passed — the Glass-Steagall Act, one of the main provisions of which was to separate the two types of entities. With some exceptions, the act made it a felony for anyone to engage in both deposit taking and the security business at the same time. This lowering of risk was essential, because the Glass-Steagall Act also created the FDIC, providing for government insurance of deposits.
Fast forward sixty-five years to the 1998. Bob Rubin is Bill Clinton’s Secretary of the Treasury. He’s also one of the three most highly paid members executives at Citibank (soon to become Citigroup). Sandy Weill, Citibank’s CEO, wanted to merge with Travelers Insurance, a merger which is illegal under Glass-Steagall. So Citibank approached the Clinton administration and said, in effect, “Look, this is against the law. Can we do it anyway?” And the Clinton administration said, in effect: “Sure, what the heck.”
Of course, getting Bubba to wink and nod worked as a temporary solution, but to more systematically dismantle the protections of the New Deal against rampant speculation and smash and grab capitalism, Glass-Steagall had to go. So in 1997 and 1998, brokers, bankers, and insurance companies pitched in and spent $300 million to effectively ask Congress, in effect, “Hey fellows, can we get rid of this pesky Glass-Steagall act so we can keep doing this?”
In those years, $58 million went to Congress directly, $87 million went to “soft money” contributions to both parties, and $163 million went to lobbying congress.
And so of course, Phil Gramm and the Republican-led Congress said, in effect, “Sure, what the heck”.
So now here it is 2008. In the last few days the Government has spent $85 billion buying AIG, having already placed Freddie Mac and Fannie Mae in Conservatorship and having recently bailed out Bear Stearns.
It’s fair to say that the same corporate fat cats who said to Congress: “Hey fellows, can we get rid of these pesky laws that are getting in the way of us making money hand over fist” are now saying to Congress and the government, “Well, gee, that didn’t work out well — look at all these debts we’ve created that we can’t pay. Can we have some taxpayer money to bail us out?
And of course, the government and Congress will say: “Sure, what the heck”.
Today we get the news that Congress is going to create an “entity to absorb banks’ bad debt”. Wow, how will that work, I wonder? Will it just soak it up like a Bounty paper towel, using taxpayer money?
Sure. What the heck.
Meantime, as the ship of state sinks, Andre Neil writing for the Daily Kos and the Wall Street Journal’s Dave Taranto are standing on the prow having a partisan shouting match over whether we should be emphasizing Phil Gramm or Bill Clinton as the culprit here.
We have no effective opposition party in the United States, but we are all of us here on the Internet, pledging holy allegiance to the passionate insane delusion of a two-party, representative system.
Sources / Related Reading:
The Glass-Steagall Act: Commercial vs Investment Banking
Citibank-Travelers Merger and Rubin’s Board Post
Clinton, Republicans agree to deregulation of US financial system
Seven Deadly Sins of Deregulation — and Three Necessary Reforms