Did deregulation cause the economic crisis?

[Max Photon]

Sorry Chief, the problem is not the current default by homeowners on mortgages, but rather the 1971 default by the US Government on the dollar.

 

[Blue Mountain]

I have been a very strong supporter of the Free Market, but it is now painfully apparent we need SOME regulation of banking .
The whole "Blame Regulation" mantra of the Libertarians is getting little traction. That Dog Won't Hunt.
I think the trick is to avoid going overboard and adapting such heavy regulation that it backfires and banks are afraid to take ANY chances. A balance is needed.

I'd like to suggest that Canada achieved that balance.

 

[trvlr2]

One thing that any mortgage holder needs , and I have not seen the situation addressed anywhere.
*Jobs* *Work*
Gotta have that, or no-one will be able to buy any houses. Or, groceries, for that matter.
When there is no industry, there seems to be little work.

 

[MIKILLINI]

Sorry Chief, the problem is not the current default by homeowners on mortgages, but rather the 1971 default by the US Government on the dollar.

Max!! Here's something you should consider about this current mess:
Twenty of the nation's largest financial institutions owned a combined total of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion of mortgage-backed securities. They also reported selling another $1.2 trillion in mortgage-related investments on which they retained hundreds of billions of dollars in potential liability, according to filings the firms made with regulatory agencies. The numbers do not include investments derived from mortgages in more complicated ways, such as collateralized debt obligations.

 

[Francesca R]

I mention Greenspan's name in particular because of the reverence economists, politicians and media bestowed upon him. They virtually regarded him as the smartest banking mind on the planet. When he spoke, people listened because they believed Greenspan knew how the system worked and how to control it.

Right. He goes from God to Satan in a couple of easy moves (this is a general remark about Greenspan commentary, not yours in particular). I have no particular concern about his reputation, but such commentary seems to imply that everyone else in the world did and should have just played "follow the leader".

Greenspan’s low interest rate policy allowed the systemic threat to develop. Low interest rates push up housing prices by lowering monthly mortgage payments, thus increasing housing demand. Rising home prices created equity to justify 100 percent mortgages. Buyers leveraged themselves to the hilt and lacked the ability to make payments when they lost their jobs or when adjustable rates and interest escalator clauses pushed up monthly payments.

Indeed. Many people are increasingly of the opinion that we all made a big mistake in coming down from the trees in the first place. And some think that even the trees had been a bad move, and that no one should ever have left the oceans. (Douglas Adams)

You're right, this is an actual regulation. It was a quick response regulation enacted to solve a problem, but the potential problems it could create in the future were not given enough scrutiny.

I am in two minds about fair-value accounting / mark to market rules. Bad decisions based on performance-chasing are endemic in the entire banking and securities and investment business. But Japanese banks did not end up better off in the 1990s by being able to record cross holdings at book value either, and part of the reason for the huge earlier plunge in companies' stock prices everywhere this last couple of months was the lack of knowledge about what their balance sheets were worth. I think that in general I am in favour of pricing transparency but restrictions on leverage.

The excessive leverage problem was/is a huge factor.

Yes.

To shore up the credibility of the US Treasury’s own credit rating and the US dollar as world reserve currency, the US budget and trade deficits must be addressed. The US budget deficit can be eliminated by halting the Bush Regime’s wars and by cutting the extravagant US military budget. The US spends more on military than the rest of the world combined. This is insane and unaffordable. A balanced budget is a signal to the world that the US government is serious and is taking measures to reduce its demand on the supply of world savings.

Somewhat off topic. I don't think there is an inherent problem with a fiscal deficit. Some would say that a government that does not need to borrow is taxing its citizens too highly. Of course, big fiscal deficits can spook investors. There is no chance of them shrinking anywhere in the world right now though as we are witnessing a huge transfer of liabilities (and assets) from banks to governments. In economic accounting terms this is happening because the private sector deficit (in a lot of countries) would otherwise have been too big to be financed today, never mind sustainable. So not much choice.

With your last comments, could you please address the issue I raised? Traditional banks have had to be rescued too, and deposit insurance has been apparently gauranteed without limit. If Glass-Steagall was not unwound, there would simply have been more Lehman Brothers and Morgan Stanleys. And the idea that they can fail appears to have been quickly proved wrong. (I think that if the US government could wind back the clock a month, they would have saved Lehmans)

 

[SaulOhio]

I mention Greenspan's name in particular because of the reverence economists, politicians and media bestowed upon him. They virtually regarded him as the smartest banking mind on the planet. When he spoke, people listened because they believed Greenspan knew how the system worked and how to control it.

Thats a problem with the people who believe anyone can have such godlike knowledge, not with Greenspan. An economy is such a complex system, weather prediction looks simple in comparison.

You're right, this is an actual regulation. It was a quick response regulation enacted to solve a problem, but the potential problems it could create in the future were not given enough scrutiny.

They never are. Too many people openly believe in pragmatism, doing "what works" without any concern for impractical principles. But it is only principles that can allow us to even guess at unintended consequences and long-term affects.

 

[Meadmaker]

Somewhat off topic. I don't think there is an inherent problem with a fiscal deficit.

What about the fact that you end up having to pay large amounts of interest?

One pet peeve I have is that fiscal policy, and deficits in particular, are often analyzed based on their effect on the economy. This irks me a bit. For one thing, it goes to Saul's point about government trying to manipulate the economy. It usually doesn't work so well. Moreover, it misses the point entirely. The reason deficits are bad is that you have to pay them later, plus interest. When my kid starts to pay taxes, he'll be paying for our programs, and our "economic stimulus" packages.

 

[WildCat]

I just found this artricle from last February by Stan Liebowitz, which pretty much sums up my feelings on this crisis.

No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."

Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.
Sound crazy? You bet. Those "outdated" standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.

...Ironically, an enthusiastic Fannie Mae Foundation report singled out one paragon of nondiscriminatory lending, which worked with community activists and followed "the most flexible underwriting criteria permitted." That lender's $1 billion commitment to low-income loans in 1992 had grown to $80 billion by 1999 and $600 billion by early 2003.


Who was that virtuous lender? Why - Countrywide, the nation's largest mortgage lender, recently in the headlines as it hurtled toward bankruptcy.
In an earlier newspaper story extolling the virtues of relaxed underwriting standards, Countrywide's chief executive bragged that, to approve minority applications that would otherwise be rejected "lenders have had to stretch the rules a bit." He's not bragging now.

Blather on about deregulation all you want, but the root cause of all of this is banks lent money to people who couldn't pay them back. And it was the regulators who pressured the banks to make those loans, they certainly weren't lining up to make them before the regulatory pressure was applied.

And a more recent article by the same author:

HOW did America wind up in its worst financial crisis in decades? Sen. Barack Obama explained it this way last week: "When sub-prime-mortgage lending took a reckless and unsustainable turn, a patchwork of regulators systematically and deliberately eliminated the regulations protecting the American people."

That's exactly backward. Mortgage lending took that "reckless and unsustainable turn" because of regulation - regulation driven by liberals and progressives, not free-market "deregulators."

Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices.

The mortgage market was humming along just fine when, in the late 1980s, progressives decided that it needed to be "fixed." Their complaint: Some ethnic groups got approved for mortgages at lower rates than others.

 

[Blue Mountain]

I just found
Blather on about deregulation all you want, but the root cause of all of this is banks lent money to people who couldn't pay them back. And it was the regulators who pressured the banks to make those loans, they certainly weren't lining up to make them before the regulatory pressure was applied.

Maybe they weren't lining up to make those loans because if they had done so previously they would have been in trouble with the regulators.

I'm going split a hair here: it wasn't regulatory pressure being applied, but political pressure coupled with a loosening of the regulations.

Government is not a monolithic entity where every person thinks exactly the same. In any large organization you can run into a problem where departments often (and unwittingly) work against each other. In this case, one part of government (the politicians) wanted to spur on home ownership, and one strategy used to achieve that was asking banks and other mortgage institutions to give out loans to people who weren't qualified.

Another part of government, the regulators, had a duty to ensure the loans being given out were properly secured, if the banks weren't going to do that themselves. I wouldn't be surprised to hear that people in the regulatory arm were sounding alarm bells several years ago, only to have them ignored by the politicians or even silenced.

In this case, "deregulation" is not the active removal of regulations, but merely changing them so that they become ineffective. Sure they're are still on the books, but they just don't work anymore. Sort of like raising the speed limit in town to 100 mph; there's still a regulation in place, but it no longer serves its intended purpose. The regulators (the police) are still doing their job, but they can no longer hand out tickets to people going 80 mph through a school zone. Their hands have been tied by the idiot politician who got the law passed in the first place.

 

[SaulOhio]

Blue Mountain: Either way you look at it, its not the free market at fault, because the market was not free.

Why would a banker in a free market offer a loan to someone who could not repay it? In our present economy, he might be tempted simply because some government sponsored enterprise might buy the mortgage form him, giving him all the profits and taking the risk off his hands. But if not for that government backing, where is the profit in making a lot of bad loans?

Thats the biggest problem with our present banking system. In a free market, a banker and his depositors would take on all the risks of lending money on themselves, strongly motivating them to be very carefull about who they lend their money to. With all sorts of bailouts, FDIC insurance, Federal Reserve loans and such, the risk is alleviated, and lenders become a lot less careful with their money.

 

[ServiceSoon]

I just found this artricle from last February by Stan Liebowitz, which pretty much sums up my feelings on this crisis.

Blather on about deregulation all you want, but the root cause of all of this is banks lent money to people who couldn't pay them back. And it was the regulators who pressured the banks to make those loans, they certainly weren't lining up to make them before the regulatory pressure was applied.

And a more recent article by the same author:

Why did the same type of crisis occur in other countries that didn't have similiar legislation that you say caused the USA's problem.

 

[Toke]

Why wont your goverment let the free marked do its magic instead of interferring with
700bn??

 

[SaulOhio]

ServiceSoon: Because they had different policies, including central banking causing inflation. Also, national economies are interconnected. Banks in one country borrow from banks in other countries. Normally, this would be a good thing. I approve of international economic cooperation and trade. But in this case, it made the problems international, as well.

Toke: Because many people in the government have a vested interest in the very businesses that are threatened by this crisis. And even many who believe it was government that caused the crisis believe that the bailout is necessary to prevent a lot of harm to lower and middle class people who are much less responsible for the crisis. But its still a bad idea.

 

[MIKILLINI]

With your last comments, could you please address the issue I raised? Traditional banks have had to be rescued too, and deposit insurance has been apparently gauranteed without limit. If Glass-Steagall was not unwound, there would simply have been more Lehman Brothers and Morgan Stanleys. And the idea that they can fail appears to have been quickly proved wrong. (I think that if the US government could wind back the clock a month, they would have saved Lehmans)

Yes, there simply would have been more Lehman Brothers and Morgan Stanleys, but the difference here is a long concerted effort in watering down the "good intentions" and principle of Glass-Steagall subsequently leading to where We are now.

The law baned commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage).
Glass-Steagall had further legislation added to it in 1956 through the Bank Holding Company Act, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.
The beginning of the end of G-S was a long process. The first big push was to try and get Congress to allow banks to enter the municipal bond market in the 60's.
In the 1970s, brokerage firms began to offer banking products like interest-bearing money-market accounts that allow check writing as well as credit and debit cards. These firms operated outside of G-S, effectively skirting the law.

Just to derail a bit here, Max Photon prefers to argue that 1971 was the catalyst moment when the standard changed from gold to paper, thereby devaluing the dollar. But Max is arguing this one in another thread.

1986-87. Citicorp, JP Morgan and Bankers Trust lobbied the Federal Reserve to relax Glass-Steagall restrictions so that they could enter the municipal bond market and mortgage-backed securities.

In December 1986, the Federal Reserve Board reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase "engaged principally" in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.
The Fed Reserve Board Chair, Paul Volcker, expressed his fear that lenders would recklessly lower loan standards in pursuit of lucrative securities offerings. He predicted they would then market bad loans to the public.

In the spring of 1987, the Fed Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities.

In August 1987, Alan Greenspan became chairman of the Federal Reserve Board. Greenspan was a former director of J.P. Morgan and a proponent of banking deregulation.

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the G-S loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Fed to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

1991-95. As a result of two waves of regulations, the number of banks in the United States was cut in half in less than ten years. Each proposed merger sailed through, despite some resistance from community groups. Evoking the CRA, community groups could pressure regulators to deny a merger either because the bank doesn’t serve the poor. In most cases, the banks would agree to lend more to the poor in the future.

In December 1996, with the support of Chairman Greenspan, the Federal Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of G-S effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

On April 6, 1998, The CEOs of Travelers (which owned the investment house Salomon Smith Barney) and Citicorp announced a stock swap that would create the world's largest financial services company. To get Fed approval, Citicorp and Travelers promised they would take “all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal.”

In the 1997-98 election cycle, the finance, insurance, and real estate industries spent more than $200 million on lobbying and more than $150 million on political donations. Members of Congressional banking committees and other committees with jurisdiction over financial services legislation were singled out for major contributions.

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the G-S. On April 6, 1998, The CEOs of Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank) announced a stock swap that would create the world's largest financial services company.

The Glass-Steagall and Bank Holding Company Acts were designed to prevent this kind of mega-company: a combination of insurance underwriting, securities underwriting, and commercial banking.


On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate.

Just days after the administration agreed to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, accepted a top job at Citigroup.

Over the past 20 years, both parties have been so ‘in thrall’ to market fundamentalism that they have repealed the key protections put in place by the New Deal. As a result, today’s economy looks too much like the economy of the late 20s and early 30s.

Now that we are near the end of the first decade of the 21st Century, we can look back and see a series of bursting bubbles and ineffective responses on the part of both the Federal Government and Wall Street. Here’s a quick run-down: 2001: the Enron scandal unfolds. Then, the dot.com bubble burst. What did Wall Street learn from these? Not much. They moved on to embrace the next hot thing: subprime mortgages. By late 2006, reckless lending practices catch up with Wall Street, and we find ourselves in a full-blown mortgage crisis. In March 2008, the government bails out Bear Stearns. Six months later, we're taking over Fannie Mae and Freddie Mac. And then soon after: A.I.G.
ETA: I suppose We Americans can thank ourselves for now owning the largest insurance company in the world!

 

[Meadmaker]

Maybe they weren't lining up to make those loans because if they had done so previously they would have been in trouble with the regulators.

I'm going split a hair here: it wasn't regulatory pressure being applied, but political pressure coupled with a loosening of the regulations.

Thank you. You said it better than I was thinking it.

 

[MIKILLINI]

Just days after the Clinton administration agreed to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, accepted a top job at Citigroup.

This is one of many key points, but I think it is the most revealing. BTW, Rubin is now Barack Obama's economic adviser.

 

[Francesca R]

What about the fact that you end up having to pay large amounts of interest?

That is not necessarily "bad". The alternatives to borrowing are 1) don't do the spending in the first place / cut spending elsewhere, 2) raise tax, 3) sell state owned assets or 4) print money. The argument can often be made that borrowing is better than those four--sometimes.

One pet peeve I have is that fiscal policy, and deficits in particular, are often analyzed based on their effect on the economy. This irks me a bit.

Well the reasons for fiscal policies boil down to long, medium or short term management of economic supply and demand.

The reason deficits are bad is that you have to pay them later, plus interest.

All of my (1-4)above are "bad" in the sense that they impose a cost on somebody or other.

When my kid starts to pay taxes, he'll be paying for our programs, and our "economic stimulus" packages.

If the economy grows (in real terms) between now and then, he may eventually have more income than you with which to pay it, and the reason why he has more income may be because your country borrowed/spent on his behalf today. The Clement Attlee 1945-51 government of the UK borrowed massively (particularly from America) to rebuild the war-shattered economy, nationalise industries and form the welfare state, and probably most of the grandkids of people around then are glad about it today.

 

[Francesca R]

Yes, there simply would have been more Lehman Brothers and Morgan Stanleys, but the difference here is a long concerted effort in watering down the "good intentions" and principle of Glass-Steagall subsequently leading to where We are now. [ . . . ]

Thanks for that info

 

[Gord_in_Toronto]

Yes, there simply would have been more Lehman Brothers and Morgan Stanleys, but the difference here is a long concerted effort in watering down the "good intentions" and principle of Glass-Steagall subsequently leading to where We are now.

The law baned commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage).
Glass-Steagall had further legislation added to it in 1956 through the Bank Holding Company Act, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.
The beginning of the end of G-S was a long process. The first big push was to try and get Congress to allow banks to enter the municipal bond market in the 60's.
In the 1970s, brokerage firms began to offer banking products like interest-bearing money-market accounts that allow check writing as well as credit and debit cards. These firms operated outside of G-S, effectively skirting the law.

Just to derail a bit here, Max Photon prefers to argue that 1971 was the catalyst moment when the standard changed from gold to paper, thereby devaluing the dollar. But Max is arguing this one in another thread.

1986-87. Citicorp, JP Morgan and Bankers Trust lobbied the Federal Reserve to relax Glass-Steagall restrictions so that they could enter the municipal bond market and mortgage-backed securities.

In December 1986, the Federal Reserve Board reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase "engaged principally" in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.
The Fed Reserve Board Chair, Paul Volcker, expressed his fear that lenders would recklessly lower loan standards in pursuit of lucrative securities offerings. He predicted they would then market bad loans to the public.

In the spring of 1987, the Fed Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities.

In August 1987, Alan Greenspan became chairman of the Federal Reserve Board. Greenspan was a former director of J.P. Morgan and a proponent of banking deregulation.

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the G-S loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Fed to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

1991-95. As a result of two waves of regulations, the number of banks in the United States was cut in half in less than ten years. Each proposed merger sailed through, despite some resistance from community groups. Evoking the CRA, community groups could pressure regulators to deny a merger either because the bank doesn’t serve the poor. In most cases, the banks would agree to lend more to the poor in the future.

In December 1996, with the support of Chairman Greenspan, the Federal Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of G-S effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

On April 6, 1998, The CEOs of Travelers (which owned the investment house Salomon Smith Barney) and Citicorp announced a stock swap that would create the world's largest financial services company. To get Fed approval, Citicorp and Travelers promised they would take “all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal.”

In the 1997-98 election cycle, the finance, insurance, and real estate industries spent more than $200 million on lobbying and more than $150 million on political donations. Members of Congressional banking committees and other committees with jurisdiction over financial services legislation were singled out for major contributions.

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the G-S. On April 6, 1998, The CEOs of Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank) announced a stock swap that would create the world's largest financial services company.

The Glass-Steagall and Bank Holding Company Acts were designed to prevent this kind of mega-company: a combination of insurance underwriting, securities underwriting, and commercial banking.


On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate.

Just days after the administration agreed to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, accepted a top job at Citigroup.

Over the past 20 years, both parties have been so ‘in thrall’ to market fundamentalism that they have repealed the key protections put in place by the New Deal. As a result, today’s economy looks too much like the economy of the late 20s and early 30s.

Now that we are near the end of the first decade of the 21st Century, we can look back and see a series of bursting bubbles and ineffective responses on the part of both the Federal Government and Wall Street. Here’s a quick run-down: 2001: the Enron scandal unfolds. Then, the dot.com bubble burst. What did Wall Street learn from these? Not much. They moved on to embrace the next hot thing: subprime mortgages. By late 2006, reckless lending practices catch up with Wall Street, and we find ourselves in a full-blown mortgage crisis. In March 2008, the government bails out Bear Stearns. Six months later, we're taking over Fannie Mae and Freddie Mac. And then soon after: A.I.G.
ETA: I suppose We Americans can thank ourselves for now owning the largest insurance company in the world!

Thanks for that. I'll leave others more qualified than me to do the critiquing but you have provided a nice summary and timeline that certainly ties things together.

 

[Francesca R]

FFS At least I snipped the quote! Bah . . .