The blame game: 99% Republicanism?

Just some non-expert thoughts on “the subject”: Cannot a huge amount of the blame for the current financial crisis be laid on three factors from the last 10 years: (1) the 1998 repeal of the New Deal-era Glass-Steagall Act, which had outlawed institutions combining commercial banking (regulated by Comptroller of the Currency) with investment banking (unregulated, able to dream up new investment vehicles without government oversight, like "mortgage-backed securities"); and (2) the successful effort by Bush’s Comptroller of the Currency, with cheerleading from the big national bankers, to eliminate by Federal preemption any activity by state attorneys general to enforce state laws against predatory and deceptive practices in lending by the national banks. Previously, the OCC had limited its assertion of preemption authority to areas in which specific Federal regulations had been adopted, but had left the states to hold national banks to the same deceptive practices standards as state-chartered banks; and (3) Alan Greenspan’s refusal to at least use his bully-pulpit powers against the housing bubble?

While in theory the states still had the power to go after unregulated offerors of sub-prime mortgages, didn’t the preemption regulations issued by the OCC undermine state efforts to attack predatory practices, with every lending institution falling into an “if-we-don’t-do-it-they will” mode of thinking (with “it” being loans far outside of the institution’s and the industry's historical standards)? Wasn’t the sense of free-for-all in mortgages itself a huge contributing factor to the housing bubble by allowing more buyers into the market for homes to drive up prices (along with Alan Greenspan’s refusal to try to puncture the bubble early, inasmuch as the Bush economy was being propped up by the ersatz equity – the sense of wealth for spending, as well as borrowing against that supposed equity -- that American homeowners thought they had)?

And didn’t the final repeal of the enforced separation between staid old commercial banks and the investment banks with their fancy new “investment vehicles” with high returns make matters worse than they would have -- by putting the commercial banking arm at risk due to the actions of the investment bank, i.e., the very thing Glass-Stiegall was intended to prevent? Another key element in this is the rating agencies who gave some of the mortgage-backed securities AAA and other ratings far higher than they deserved. They were racked with inherent conflicts-of-interest, since the system was voluntary: they depended on the investment companies for the business of rating their securities. Did any agency sue them for such conflicts-of-interest?

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Moving on to the blame game, which every American has a right and a duty to do, I see the handprint of Republicanism at every fatal step of the way. The Gramm-Leach-Bliley Act provisions repealing the last core provisions of Glass-Steagle was signed by Clinton, but the vote was virtually 100 per cent of the majority Republicans in favor of the bill, and 100 per cent of the Democrats against. For Clinton, it was probably a case of discretion being the better part of valor – plus some Iagoisms about the need to move on from Depression-era thinking from once-and-future Goldman Sachs CEO Robert Rubin, Clinton’s Secretary of the Treasury. (I guess Rubin was right about balancing the budget combined with high employment and wage growth as being possible, but probably wrong about this.) But it was 95 per cent a Republican thing. It was certainly 100 per cent the Republican way of thinking about keeping government out of Wall Street’s business. Phil Gramm, after all, is the McCain economics adviser who called Americans a bunch of whiners.

The unprecedented position undermining state governments attempting to enforce their deceptive practices laws on an equal playing field with local banks was taken by Bush’s OCC in the 2003-04 period. Although it was surprisingly upheld by some of the so-called liberal members of the Supreme Court, certainly its genesis was from a Republican administration with close ties to the biggest players on Wall Street (and K Street). (It is, by the way, another prime example of the sheer hypocrisy of the modern Republican Party, since the new regulations involved the Federal government grabbing power away from the states.)

Alan Greenspan is a Republican, or at least he was (although he has claimed he is mostly a libertarian). Regardless of his formal affiliation, Greenspan was a key enabler of the Bush phony growth economy: he refused to criticize the tax cuts for the wealthy that he knew perfectly well were going to cause more problems than they solved; he kept interest rates artificially low to stimulate the housing bubble as well as, with less-than-necessary effect, economic activity in general; and he refused to try even to prick the bubble.

The purpose of the blame game is not really to identify individuals and excoriate them. After all, they usually thought they were doing the right thing. Democrats, too, have had their hand in setting up the financial system that has failed. Rather, it’s to identify the causes so we can try to fix them. And to put in power those who are most susceptible to pressure from ordinary Americans, consumers, and will be most likely to adopt policies intended to fix them.

Having said that, however, one part of the blame game should be to identify fraud and prosecute it. What sticks the most in the craw about the “bailout” is less the cost of saving a system we all depend on, even if some of the institutions that helped create the mess are themselves saved, but the people, the mucky-mucks, who basically have gotten away with murder – getting out with tens or hundreds of millions in their own personal Swiss bank accounts. There had to be massive fraud throughout the system at every step of the way: rating agencies that knew the mortgage-backed securities were dependent on an ever-rising housing market, along with other built in risks, that made their ratings a fraud on every buyer who relied on them; the investment banks that compiled the mortgages and issued securities, knowing perfectly well that the entire structure depended on a real estate market that had skyrocketed far beyond historical trends and on ever-rising real estate values anyway. There are thousands of cases where these securities were marketed with full knowledge that they carried risks that were not being fully explained to their buyers. That is fraud. Obama can score huge with identification of the fact that this – getting the culprits who profited -- is the unfinished business of the bills that have been considered. But it doesn’t have to be part of the bill. A clear and believable promise to launch a full-scale investigation and pursue new legislation if necessary if he is elected is all that can be offered now.

These are the presumably logical ramblings of a non-expert trying to write my way to a clearer understanding of what’s going on and what needs to be done about it. I welcome corrections, additions and clarifications. One thing looks pretty clear to me: on this front as well as many others, putting the current Republican Party back in charge would be an unmitigated disaster for the country, completing our descent towards third-world status.