G.O.P.: You Broke It, You Bought It
Most big issues are owned by one or the other political party, even though they will find nominal supporters in both. Many Democrats have voted for tax cuts, but the Republicans have owned the issue. Republicans have voted for a higher minimum wage, but that's the Democrats' franchise. Under the pressure of popular opinion, the loser in the argument gets dragged along, like it or not.
In the current campaign, one of the signatures of the Republicans' problem is that they are losing hold of some of their pet issues. It's not the first time. Bill Clinton robbed them of their welfare rants and neutralized them on law and order (not necessarily with good policies). Now the GOP reputation on national security has suffered a well-deserved drubbing. Obama threatens to one-up them on tax cuts. (Remember, this game is not founded on a struggle for good policy.)
One can cite important instances where Democrats supported financial deregulation. Repeal of Glass-Steagal in 1999 is one. Refusal to give over Fanny and Freddy to closer supervision was another. But there should be little doubt that on balance, deregulation has been the Republicans' issue. They own it, now they ought to pay the price. Senator Phil Gramm (R-TX) was as out front on this as anyone, so by all means let's string him up, but we will need many more lamp posts. It remains the case that the GOP owns deregulation, and there is little disagreement that insufficient regulation is at the root of the problem.
Some neglected points on the main themes of the day:
* The Glass-Steagal reform of 1999, also known as Gramm-Leach-Bliley, signed into law by Bill Clinton. (Republican Jim Leach is an Obama supporter.) This eliminated the separation between dull, ordinary banking and investment banking. It is fair to say this act was inspired by a malign philosophy of deregulation, but not necessarily accurate to blame the act itself for the current troubles. In fact, the act makes possible some of the reorganizations now (i.e., Bank of America's purchase of Merrill Lynch) that may ease the crisis.
* Fannie and Freddy. (Best headline in all this: "Freddy's Dead," from Dean Baker.) People are mucking up the timeline. For many years Republicans have criticized F&F as unreasonable intrusions into the private sector. The critique was that they posed unfair competition, on the strength of their Federal government backing, not that they would collapse the financial system. F&F are typical of U.S. domestic policy in that a defensible policy objective -- affordable housing -- requires compromise and accommodations to corporate lizards for political sustainability. F&F are lousy with Democratic big-shots, as Jack Shafer points out.
In 1987 the Reagan Administration affirmed its determination to see F&F privatized. (Interestingly, at the same time they permitted F&F to deal in mortgage-backed securities.) In this respect, G.O.P. opposition has been one of a broken clock. It would be just as accurate (more, actually) to say that since Marxists predict financial calamity, they were right all the time too.
In 2003 the Bushists offered a plan to recast F&F and Democrats resisted, out of fears that support for affordable housing would contract. The critique included concerns about lax lending standards. In fact Fannie had been screwing around with derivatives. Of course, housing ended up getting a bit too affordable. Chief Fannie Franklin Raines ended up supporting the Bush proposal. A search of New York Times and Washington Post archives fails to find any association of John McCain and criticism of Fannie Mae. If you can find anything in or before 2003, feel free to provide a link.
Also in 2003, Barney Frank said there was no crisis with F&F, in response to Bush Administration efforts to reorganize the institutions. Barney was obviously wrong, but the Republican critique was narrowly focused on F&F, not on the financial system as a whole. There is no argument that F&F instigated the downfall of Merrill Lynch, Bear Stearns, Lehman Brothers, or AIG. They are all big boys who should have known how to take care of themselves. Note, Obama is not serving in the Senate until 2005, so he could not have been "in the middle" of anything re: F&F.
It wasn't until 2006 that McCain makes any noticeable waves regarding F&F. At that point, he joined with those who anticipated problems, after a lengthy Bush Administration report that sounded the alarm about shaky accounting practices. A bill was originally sponsored by Chuck Hagel (Obama supporter), Liddy Dole, and John Sununu. McCain later joined as co-sponsor. The main thrust of his critique was an anti-corruption argument, with a throwaway reference to dangers to the housing market and financial system. Prior to the issuance of this report, for all his time in the Senate, McCain is invisible on Fannie Mae.
* The Community Reinvestment Act (CRA). A vile racist narrative is circulating, to the effect that bad loans to black folks superintended by the African-American Franklin Raines of Fannie Mae are at the root of the crisis. Passed in the late 1970s, if CRA caused the meltdown, it has to be one of the slower-acting financial reforms in history. More important, The anti-CRA argument bespeaks financial illiteracy on its face.
If all we had to fear were bad mortgage loans, this would be a much easier crisis to bear. The far greater problem is all the pyramiding financial paper on top of mortgages, entangling a multitude of parties and transactions across the globe, that threatens to put the system under. You can't pin that on some brother in Baltimore who over-leveraged. In this sense the financial crisis parallels the bankruptcy bill debate. All of these transactions took two to tango. Whatever pressure there was on mortgage lenders founded on regulation, you can't ascribe the subsequent leveraging at Lehman Brothers, F&F, AIR, etc. on mortgage borrowers and be a decent person. The $100 trillion pyramid goes back to financial deregulation, not mortgages or F&F. Moreover, boostership for home ownership has always been a bipartisan affair.
At least they didn't blame the Jews.
* The Securities and Exchange Commission, under the intrepid leadership of Republican Harvey Pitt, granted exemptions on capital reserve requirements (how much an institution can in effect borrow relative to its assets) to five major investment banks, three of which are now dead (Merrill Lynch, Lehman Brothers, and Bear Stearns). The other two are Morgan Stanley and Goldman Sachs, both of which have lost huge shareholder value in past weeks. Nouriel Roubini says they are both doomed as well. In response, current SEC head Republican Christopher Cox has been babbling about short sales as if they had something to do with the crisis. All a short sale does is help to reveal what a publicly-traded firm is really worth, as opposed to what they would have you believe it is worth.
* "The era of big government is over." Ha-ha. One form of deregulation that does not involve legislation is winnowing the Federal workforce, depriving it of the wingtips on the ground necessary to actually enforce laws, including exercising oversight of financial miscreants. We had plenty of triage under the Clinton Administration, as well as the Bushists. Clinton economist Laura Tyson (see below) boasted of their success in eliminating civil service slots.
* I pity the fool. Perhaps the most dispiriting thing about this affair is to whom Obama turned as his "A-team" at a moment of economic crisis: Paul Volcker, Larry Summers, Robert Rubin, and Laura Tyson. Can there be any doubt who is in charge here? No "team of rivals" in sight. I don't know why Tyson was there. Maybe it was to keep the minutes. She doesn't know anything about finance. God love her, her academic field was labor managed firms in Yugoslavia. These are your overlords in the event of a Democratic victory. Meet the new boss, by god the very same old bosses. I know, we shouldn't be surprised. But at least are allowed to be depressed. Can two former Goldman Sachs biggies -- Rubin and Paulson -- be relied upon to provide good advice on matters intimately related to the survival of their firm? Would you call in the heads of the oil companies to fix our energy policy? Cheney would, and did; are the Democrats different in this respect? Evidently not.
* Back to deficit dementia. One set of noteworthy ambulance chasers are the so-called fiscal conservatives, such as the Concord Coalition and David Walker of the Peter Peterson Foundation. The prospect of additional public debt gives them fresh inspiration to bray about "getting the Federal government's fiscal house in order." Translated this means cutting Social Security and health care benefits. That's the battle we will be fighting in the Golden Age of Obama.
As far as deficits are concerned, we need to distinguish between the chaos in financial markets and the slow-down in employment. The latter would benefit from fiscal stimulus, ideally provided through aid to state and local governments and Federal public investment. The immediacy ordinarily sought in spending seems less relevant, in light of the potentially lengthy economic slump before us.
Before this thread gets overwhelmed with comments expressing outrage over the enactment of Gramm-Leach-Bliley, I thought -- since I'm not well grounded in that law -- I'd ask a question.
As Nouriel Roubini points out, the investment bankers' business model doesn't work when under stress. The reason is that they borrow short and lend long (thus, being subject to runs) while unlike the commercial banks, they don't take in deposits and don't belong to the FDIC (the defense to runs). He concludes that each must merge with a large commercial bank or go out of business -- as Merrill Lynch did and as Morgan Stanley may.
Citigroup and J.P.Morgan-Chase are Gramm-Leach-Bliley firms and thus far, have been able to weather the crisis. And as Dr. Rotwang points out G-L-B allowed BofA to save Merrill and remove that stress from the market.
Should we be quite as upset over G-L-B as we appear to be? Why?
September 21, 2008 4:50 PM | Reply | Permalink
Absolutely, you don't want investment banks and commercial banks together because an inherent conflict of interest exist when selling securities and making loans from savings deposits. This puts peoples savings at risk.
September 21, 2008 5:40 PM | Reply | Permalink
Yes, I think the problem begins with the securitization of stock indexes. It worked great for the fund managers, the mathematics was appealing, and after banks and brokerages and insurance companies were free to merge, why not take a bunch of mortages and bundle them together just like an equity index?
The problem may be must lighter with fixed rate mortgages, but with mortgages for 125% of collateral, 0% down payment, ballons and sub primes, you have either are very fragile situation with the consumer, or a dynamic situation that could come easily undone by divorce, unemployment or sickness, or rate reset. And how to you refinance, once they begin to forclose? You can't go to another lender. Who do you negotiate with when you're unable to meet your newer, higher payments? Nobody. This does not happen with stock index securities. The consumer never needs to refinance. I see this inability to come to affordable terms as the root of the problem. It is clear that some bank players actually counted on defaults that would permit them to keep the existing equity and then resell the house, hopefully for a greater price. Except that there were so many forclosures that the market inventory was too high, and things ran away from them.
September 21, 2008 7:16 PM | Reply | Permalink
But weren't first, Bear Stearns and later, Lehman Brothers the biggest securitizers of dicey mortgages.
G-L-B had no effect upon either investment bank either way, yes?
September 21, 2008 7:21 PM | Reply | Permalink
GLB accommodated financial convergence without setting up a framework for effective regulation of companies and markets in a post-Glass-Steagall world.
The law "did not resolve the regulatory structure — it made it worse.It resolved the question about insurance affiliation, expanded bank holding company powers, and kicked every other hard question down the road." so said Cantwell F. Muckenfuss 3rd, a partner in the Washington office of Gibson, Dunn & Crutcher LLP.
It did not establish a consolidated regulator for complex organizations, nor did it resolve the responsibilities of the state and federal government.
There is simply no provision in the law that requires investment bank holding companies to compute capital measures or to maintain liquidity on a consolidated basis. Nor does the law provide for a consolidated supervisor that is knowledgeable in their core securities business, and that would be recognized for this purpose by international regulators.
September 21, 2008 8:32 PM | Reply | Permalink
Yes it did because they turned mortgages into something like a stock to be traded on the market. Bear and Lehman were not mortgage originators, the banks were. By removing the securities restrictions from banks you remove the barrier that protects savings accounts. That's where the conflict of interest is introduced. People need to trust their saving will not disappear. The regulation preventing banks from trading securities was there to provide protection for saving deposits so people could trust their bank. What Phil Gramm did was a serious breach of trust. This theft of the highest order. They knew this would happen. Heads should roll over this.
September 21, 2008 9:49 PM | Reply | Permalink
What we are seeing now amounts to a "bank run on the shadow banking system". To the extent that Glass-Steagall still exists (ie, none :-) ), things classified as banks are at least safe from this.
September 21, 2008 11:00 PM | Reply | Permalink
The "investment banking model" is, as of last night, officially dead.
September 22, 2008 10:01 AM | Reply | Permalink
Paulson's Bank Bailout: The Biggest Swindle Ever Pulled!
By John Hoefle
September 20, 2008 (LPAC)--Lyndon LaRouche has a clear warning to the pack of fools pushing the largest bank bailout in history: Don't do it, and if you do, don't expect to get away with it. There will be consequences for such treasonous stupidity, far beyond what you can imagine.
The plan, presented by Treasury Secretary Henry Paulson and supported by Fed chairman Ben Bernanke, President George W. Bush and a gaggle of international bankers and other idiots, would transfer most of the enormous losses incurred in the death of the global financial system, from the books of the banks to the Federal government, and the U.S. taxpayer.
This scheme is being marketed to a frightened public as a "bold'' plan to "solve'' the financial crisis once and for all. What it really is, is the biggest theft in history, a act of monumental stupidity which will destroy everything in its path: the economy, the nation, and the people. There is nothing good about it.
- Absolute Insanity -
"This is the biggest swindle ever pulled,'' LaRouche said. "It is absolute insanity. The public is being duped.''
Virtually nothing Paulson has said is true--it is all lies designed to dupe Congress and the American people into believing that this gigantic ripoff is both necessary and in the public interest, when neither is true. The lies began well before Paulson, when we were told that finance, not production, was the road to wealth. For the past four decades, we have seen the systematic dismantling of American industry and agriculture, and the turning of our economy into a giant casino. Our banking system has been turned over to the speculators, and we have watched a relatively small portion of our population get rich--some obscenely so--while a growing portion fell into poverty, and others were pushed over the edge. Every protection put into law to stop such looting has been systematically repealed, including the Glass-Steagall Act which forbade commercial banks from engaging in investment banking. Now that system has collapsed, and we are being told that the people must bail out the crooks.
The final phase of this collapse began last year, with the mythical "subprime crisis,'' a deliberate misnomer. Then this "subprime crisis'' somehow morphed into a "credit crunch,'' infecting an "otherwise healthy'' banking system. It was, from start to finish, a lie carefully constructed to support the ultimate demand for a bailout.
Here's what really happened, and it all starts with the banking system. The banks built up a huge derivatives bubble in the 1990s, a pyramid scheme which constantly needed more money fed into its maw to keep it going. One of the prime sources of fuel was mortgages, which were used to spawn mortgage-backed securities and even wilder forms of casino chips like CDOs. The more mortgage money came in, the larger the profits that could be made from speculating in the securities, yielding more money for new mortgages. It was this securities machine which drove housing prices--and the mortgages on those houses--into the stratosphere. However, the machine worked so well that it drove housing prices beyond the reach of many Americans, so, in order to keep the mortgages flowing in, the banks began to relax loan standards, and in the end were selling homes to people who could not afford them, just to keep the game going. It finally got to the point that prices were so high, that even with the lax lending standards they couldn't keep the game going, and the whole house of cards collapsed. The subprime loans collapsed first because they were the shakiest, made at the top of market, so the banks painted the subprime lenders and borrowers as the villains, as a way of covering up their own role. It was a classic "blame the little guy'' scam.
Now we see Paulson asserting that the banks have been infected by this "housing crisis'' and that in order to protect the American people we must launch the biggest bank bailout in history. But it was Paulson, a former investment banker, and his investment banking buddies and their predecessors, who created this mess in the first place, and are now demanding that they be saved from the consequences of their folly, and handing the bill to the people they have been victimizing for decades. The foxes are demanding that the chickens pay for cleaning up the blood in the chicken coop.
September 20, 2008:
Lyndon LaRouche, and John Hoefle of EIR, on "When the Crash Comes: Whom Will You Trust?" Hosted by Harley Schlanger.
http://www.larouchepub.com/radio/archive_2008.html
September 21, 2008 4:59 PM | Reply | Permalink
Thank God for Lyndon LaRouche, huh? Hey, didn't he die about 10 years ago?
September 21, 2008 5:09 PM | Reply | Permalink
Yes he's dead, they use his freeze-dried cadaver and a tape recorder. For 30 years he's been saying the financial system would collapse, so his acolytes don't know the difference.
September 21, 2008 9:18 PM | Reply | Permalink
Actually, it's probably been 37 years -- Nixon closing the gold window and going full out fiat currency.
Why is it that a prophet is never honored in his own land?
September 21, 2008 9:31 PM | Reply | Permalink
For a neo-Nazi loon, the honor is hard to come by.
September 21, 2008 9:54 PM | Reply | Permalink
Godwin's Law! Godwin's Law! Godwin's Law!
If only LaRouche and his followers weren't so long-winded.
September 22, 2008 7:52 AM | Reply | Permalink
Can someone in this thread please tell me what is wrong with this LaRouche analysis? All I see are ad hominen attacks. He is right that this bailout is bad, stupid, insane, won't work, etc. So why are Dems supporting it, at least in the main? Basically, all they are asking is to add some amendments (like foreclosure protections) to a toxic give-away to the financial pirates who have raped and pillaged the US economy for 37 years. That's like offering a man you are going to execute with a bullet to the head an extra spiffy funeral as recompense.
September 22, 2008 5:02 PM | Reply | Permalink
That is exactly the question the Apostles asked as they waited by the sea of Galilee for their Master to return with Elvis in his flying saucer.
September 21, 2008 10:33 PM | Reply | Permalink
hoppy asks:
Nah, he didn't die, he changed his name to L Ron Hubbard and started Scientology.
By the way, this is not to say the LaRouch opinion above is wrong.
September 22, 2008 10:02 AM | Reply | Permalink
hoppy asks:
Nah, he didn't die, he changed his name to L Ron Hubbard and started Scientology.
By the way, this is not to say the LaRouch opinion above is all wrong.
September 22, 2008 10:39 AM | Reply | Permalink
Obama will have a hard time making the Republicans "own" this issue (as they should) if he continues to refuse to launch an all out partisan attack on the part of corruption, crime, incompetence and misrule. If he would just drop that namby pamby "bipartisan" bullshit he could secure a comfortable victory for himself and for Democrats down the line.
Every time I hear Obama talking about the virtue of bipartisan solutions, other than making me want to puke, I think of the following quote from a Krugman column I read last month:
"In any case, remember this the next time someone calls for an end to partisanship, for working together to solve the country’s problems. It’s not going to happen — not as long as one of America’s two great parties believes that when it comes to politics, stupidity is the best policy."
September 21, 2008 6:01 PM | Reply | Permalink
That should read the "party" of corruption, etc...
September 21, 2008 6:01 PM | Reply | Permalink
I agree! And wouldn't it be ever, ever so much easier to force Republicans to own the financial implosion if the Democrats had had the guts to speak out long, long ago. When we started running from the legacy of FDR we became a valueless party and a worthless opposition and we let down the country in the process.
September 21, 2008 7:17 PM | Reply | Permalink
Dang, I agree with you guys so much, and my Red Meat posts from convention week agree with you even more, but I think he's just strategically pretending to be "post-partisan."
Hmmm.... Argh... I'm torn.
But I do love his strength and economic voice that he found this week. Keep up the fight B.O.!!
September 21, 2008 7:52 PM | Reply | Permalink
oleeb: I'm wicked torn on this. I want GOP criminals to go to jail asap, and I've faulted Barack many times for not hitting harder, but I think he's fighting the right battle on that particualr point. I think this "post-partisan" thing is a position he's taking to get elected.
But by taking the campaign stance of asking for "bipartisanship" he's pulling a lot of Independents and Moderate GOP'rs.
Do I expect him to govern from the center? No. He will clean house starting January 21st. His very presense will usher in a new era of compentence, ridding DC of the majority of wingnuts.
PS - He's Populist and mad-as-hell Barack these days, and it's sounding awesome! (NC speech today had plenty of red meat for me to chew on...) I'm loving this nuts & bolts kitchen table talk.
September 21, 2008 7:49 PM | Reply | Permalink
I certainly hope you're right, but if what we've seen in the past few days is "mad as hell Barack" then I'm not terribly impressed. If the collapse of our financial system (soon to be followed by what is left of our economy) can't get him more worked up than I've seen on tv it's really kind of sad. It also highlights that while he is certainly more in touch intellectually with reality than McCain is, Obama is clearly not in touch with the emotional temperature of the nation. Frankly, I just don't think he has it in him to get terribly emotional and worked up about anything. It's unfortunate, but I think he's very reminiscent of Dukakis in that way. Not exactly like the Duke but reminiscent. Too much intellect, not enough emotional intelligence.
As for the post-partisanship as a means of winning strategy... well that's a loser from the git go and always has been. There's simply no evidence that his limp-wristed nonpartisan rhetoric is drawing anyone to his column, let alone Republicans and independents. It's a weak, losing strategy that might have been more appropriate when the enemy was in the ascendant position but they are in full blown retreat and our ostensible leader is refusing to have the bugler blow out the command for attack! That strategy makes no sense at all in this environment unless you want to try and win in a squeaker when you could sound that horn and win in a gigantic, thundering landslide.
And, with respect, the idea that he is simply projecting that centrist, compromising image for purposes of the election but will turn left in office is simply preposterous. He really is a centrist compromiser. That's why he's so popular with centrist, compromiser Democrats in Congress. You remember them don't you? There the ones who gave away the store the past seven years when they could have blocked much of the horrific legislation Bush got passed.
September 21, 2008 10:07 PM | Reply | Permalink
Valid points, definitely. I am totally stuck on this one.
Obama's been emotional but also Presidential looking in a crisis. McCain looked like a loose canon.
Anyway, your basic point is right. Democrats as a whole -- not Barack in particular -- must tack HARD to the left now for the sake of the country.
September 22, 2008 11:22 AM | Reply | Permalink
I can't see how the recoil from this isn't going to further weaken the dollar. Are the Chinese and Saudis really going to continue to buy treasuries as it becomes increasingly obvious the dollar is simply the patch of last resort and will be sacrificed to keep the situation going as long as possible? These people bought their own rhetoric about our military being superhuman, now it's sinking into the sands of the Middle East. The dollar isn't immortal either and the point where the rest of the world runs for the door is fast approaching. We won't even be able to afford to pay Halliburton to keep the army in Iraq. What goes around, comes around.
The coming weeks will be one for the history books.
September 21, 2008 7:26 PM | Reply | Permalink
The dirty secret no one seems to be wanting to talk about is that for all intents and purposes America is bankrupt. Our fall has happened with even greater speed than the economic collapse of the British empire. It took them a few years to realize what had happened to them too. As Americans seem far more gullible than the Brits it could take several generations before our leaders and our people grasp that we are no longer the collossus we were. American world economic dominance is at an end.
September 21, 2008 7:32 PM | Reply | Permalink
Don't worry, tax cuts will fix it.
September 21, 2008 7:39 PM | Reply | Permalink
Absolutely.
Our Financial weakness has officially spilled over into the #1 threat to our National Security.
China calls in its loans. When we can't pay, they take Taiwan, and North Korea and maybe some other pound of flesh directly from our Natural Resources.
#1 status symbol in China is a black Buick. Perhaps we'll have to give them GM. No matter what they want, we'll be working for the next 100 years simply to pay off the debt we owe them. It's a travesty.
WATCH I.O.U.S.A. by Peter G. Peterson (one of the Top Capitalists of all time) and David Walker.
http://www.pgpf.org/
September 21, 2008 7:57 PM | Reply | Permalink
Yes, we exported our manufacturing to China and we pay them for cheap goods in dollars. If all their institutions put those dollars together they could walk in here and take over. Kudos to our brilliant business sector and those flag waving Republicans for orchestrating it.
September 21, 2008 9:42 PM | Reply | Permalink
Who was it that said...
"They will sell us the rope we hang them with."
September 21, 2008 10:11 PM | Reply | Permalink
One fix that is almost certain to happen is a devaluation of the dollar. This could reduce that trillion dollar problem to a 10 billion dollar problem, in current dollars. Either allowing a double digit inflation or simply deflating the value of a dollar will do it pretty easily. Of course we retirees will then become paupers, but for the Gipper, aren't we all willing to go through that?
September 21, 2008 7:35 PM | Reply | Permalink
Good point Hoppy!
I think the truth is we're going to get it all with a vengeance. Inflation and maybe even hyperinflation, the currency will become as worthless as a Weimar Deutschmark, economic stagnation, rising unemployment, and the nation will enter into nearly endless indentured servitude to our Chinese masters. All brought on by the misrule of an American Nero. Bush will go down as the man who destroyed America. In fairness, however, the congressional Democrats will go down as Bush's cowardly handmaidens who facilitated and allowed it all to come to fruition when they could have stopped him early on if only they had any balls at all.
September 21, 2008 10:17 PM