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Economic bailout destined by bipartisan politics of 1999
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What's happening to free enterprise with bail out?
America's "economic bail out" is a sell out. Our deficit government that hasn't had money in decades is buying into our bancrupt Wall Street banking system, making the US a true socialist nation. When a government that is more than 11 trillion dollars in debt owns the banks, who is the watchdog?
Americans are as concerned about economics as they have been since late 1929. For most people that I know, these are the two questions that resonate: What is happening to our economy and what can we do to shore it up and move forward?
Who is to blame?
Whether one blames Obama for his ties to Fannie-Mae or McCain for his, blame is hardly the the pertinent question. Besides,neither man is to blame, or both - that's just politics. Blaming congressional Democrats for allowing this to happen on their watch, or going back into time to blame a Republican Congress is not foremost on our collective mind. Attacking our embattled president is pointless, history will judge him and he will wrap up his administration in a few weeks and turn it all over to John McCain or Barrack Obama. By most accounts, Congress will remain largely in its present Democratic-controlled composition. In time, the ongoing investigation will give us some investment guru heads to lop off, but none will be that of a politician.
Media too politicized to help
Today, the media portrays all events in encrypted, politically-tainted sound-bites that lead one down a trail crowded with half-truths, headline grabs, and agenda-driven productions offered by poll-taking, heavily biased air personalities or “news-readers” who often don’t know much beyond what was presented for them to read on a teleprompter or assigned by a behind-the-scenes editor. Because we cannot rely on our media to introduce a bipartisan conversation, this is a time for citizens to seek clarity, more than superficial opinions of who is to blame for the current economic melt-down. The reason for our financial collapse is bipartisan in nature. Ironically, there is adequate blame to go around rather evenly. Homeowners, investment gurus, mortgage houses, banks and politicians alike took advantage of an open-ended credit policy dangerously deregulated by Democrats and Republicans alike and signed off on by President Bill Clinton in 1999.
What are origins of the current economic crisis?
Here is a bird’s-eye view of the sky-is-the-limit policies that have sent our nation’s economy reeling toward the ground in 2008. In 1933, after the market crash of 1929, the U.S. economy teetered on the edge of total collapse and the Glass-Steagall Act was passed to separate and regulate the Commercial and Investment functions of major banks in America. The banking Act of 1933 also founded the Federal Deposit Insurance Company (FDIC) which insures bank deposits by the U.S. government. The bill strongly regulated the Investment banking industry, holding Investment bankers to similar collateral formulas as Commercial Banks. Eventually, as the U.S. economy recovered, the investment bankers, who were no longer allowed to take deposits but were collaterally balanced, stood on solid ground. The sense is that our economy grew safely, if at a slower than contemporary rate.
The banking industry began seeking repeal of the Glass-Steagall Act in the 1980s. The industry was lobbying to remove the bulkhead separating Investment banking from Commercial banking, so that the coveted revenue of commercial banks could be deregulated and used by the investment and securities arm of commercial banks. Removing the firewall would enable commercial lenders, for example, Citigroup, the largest U.S. bank as measured by assets, to underwrite and trade mortgage-backed securities and collateralized debt. Ultimately, the firewall was removed by a bipartisan bill that in final revision, passed in the 1999 Senate by a bipartisan 90-8-1 vote and in the House by an equally bipartisan vote of 362-57-15. President Bill Clinton signed the veto-proof bill into law and the commercial earnings and deposits of banks became available to securities trading and investment bankers. In a nutshell, commercial banks invested very heavily in mortgage-backed securities and other obligated debt, and when the building industry bubble burst, mortgage-backed securities failed in mass, crushed by the massive weight of unrecoverable mortgage debt. When homeowners in record numbers living well beyond their means on creative and variable-rate mortgage loans stopped paying their mortgages, the lending banks and mortgage houses that provided the doomed transactions via predator loans knocked huge, gaping holes in the stock market and crippled our banking system with debt.
Today, many of the same politicians who voted to do away with the firewall between investment securities and commercial banking are dealing with the 700-billion-dollar bail out that would hide the incredible loses behind government loans, or additional deficit spending if you prefer. Either way, you pay….
Why did congress and Clinton pull the plug on regulations?
It is not my intention to force any reader’s eyelids to close so tight that eye drops must be utilized to separate them. Nonetheless, as consistent with my column, which is designed to inform, evoke and provoke meaningful conversation, I have included the principle arguments for and against preservation of Glass-Steagall as framed by 1987 congressional research and published by Wikipedia the free on-line Encyclopedia.
The argument for preserving Glass-Steagall (as written in 1987):
1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act
2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[13]
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