What follows is a synthesis, summary and abridgement of recent discussions with veteran journalist and Truthdig.com editor Robert Scheer about his new book, The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street.
By Richard Clark, OpEdNews
September 14, 2010
Try as he might, President Reagan was unable to reverse the very sensible regulations of the New Deal that were designed to prevent us from getting into another depression. Those regulations, principally Glass-Steagall, as you will recall, stated that investment banks gambling with rich people's money should not be allowed to merge with commercial banks that were using regular bank deposits insured (FDIC) by our government.
Because of the savings and loan scandal at the end of his term, Reagan actually had to sign off on increased financial regulation. But when Clinton took over at the White House, he brought in one of the big players on Wall Street, Robert Rubin, former head of Goldman Sachs, and asked Rubin this question: "What do I need to do to get Wall Street on my side?" Rubin's reply was simple: "Reverse onerous financial regulation." And Clinton complied. Then he selected Rubin as his Treasury secretary, and Rubin was followed by another Wall Street toady, Lawrence Summers, who's now the top economics adviser (guardian-protector of Wall Street interests) in the Obama White House.
In addition to approving the Gramm bill that reversed Glass-Steagall, Clinton laid still more of the groundwork for our current crisis. After Summers had pushed it through, and Congress approved the Commodity Futures Modernization Act of 2000, Clinton signed off on it as well. And this lies at the very root of our recent housing meltdown.
You see, we had these things called derivatives that a few sensible people in the administration, like Brooksley Born, had tried to warn everyone about. However, few people besides her seemed to know what these often dangerous investments were all about. And those who did know would not allow themselves to think about anything other than the enormous amounts of money that could be made from them. The bundling of mortgages, packaged together and made into securities to sell far and wide, targeting naïve and trusting investors who foolishly thought that their triple-A ratings meant something, comprises a large part of what encouraged all of the wild subprime and Alt-A financing.
Mortgage brokers couldn't find people fast enough to set up with mortgages. No job, no problem. Mortgage applications became increasingly fraudulent. But who cared? These mortgages would be packaged together with hundreds of others so that even if one or two went bad, the security package as a whole would still be worth something. Supposedly. Besides, once the sliced and diced investment units were sold to unsuspecting buyers around the world (as deregulation now allowed), it would no longer be the problem of the person or institution that put the package together.
Then too, these packaged securities were being backed by credit default swaps — a kind of insurance issued by companies like AIG, who made plenty of money off of the premiums that were paid to them, but who ultimately had nowhere near enough capital on hand to pay off the claims when the housing market collapsed, thus requiring the taxpayers to bail them out.
Bottom line: these gimmicky investment vehicles that eventually spiraled wildly out of control were made possible because of the aforementioned Commodity Futures Modernization Act, which Clinton signed and which clearly stated that no existing government regulation and no existing government regulatory body would be allowed to supervise them or regulate them, especially not the credit default swaps and collateralized debt obligations that Brooksley Born had warned everyone in the Clinton administration about, to no avail, her pleas falling on deaf ears.
As a result of no one listening to Born, we had this wild run-up of irresponsible mortgage lending. The banks no longer, as in the old days, worried about whether the borrower could make his payments or whether there was sufficient value in the house. Why not? Because they weren't going to hold that mortgage for thirty years like in the old days.
To repeat, and thus stress this key point: They were going to bundle it with hundreds of other mortgages, securitize it, and sell it, ASAP, just like they were now allowed to do, thanks to Clinton signing off on the Commodity Futures Modernization Act. That's why the wild run-up of the market should be known as the Clinton bubble.
And now, as a result, we're threatened with the very real possibility of another steep socio-economic decline, perhaps even a decade of Japanese-like stagnation. And the reason is because we taxpayers (via our underwater mortgages and via the toxic debt purchased from the big banks by the Fed) are holding trillions of dollars of these toxic investments.
As a result, housing right now is in a terrible state of affairs. There are 11 million homeowners that are underwater (mortgage debt exceeds the price for which the house can be sold). That means 50 million people living in houses that are now worth less than what is owed on them. Not surprisingly, these people are increasingly tempted to simply walk away from these houses, and many are doing so (especially the well-heeled), thereby leaving ever more banks with the loss of the money that is owed to them via the abandoned mortgages.
And then the Fed buys this toxic debt from these banks, to help them out, and this indebtedness ultimately lands back in the lap of the American taxpayer. Sweet!
Many millions of Americans have invested their life savings in their homes only to see the market value of these homes plummet, essentially wiping out much of their life savings, which is why we don't have much in the way of consumer spending right now. With much of their life savings having been thereby taken from them by the doings of Wall Street sharpies taking full advantage of the stupidity of government deregulation, many Americans are now scrambling to replace at least some of their retirement savings.
And it's not just the people who are financially in trouble with their own houses, which is a tragic enough story, but their neighbors as well — for even if someone has made every payment on their home, or even if they own their home outright, if one or two houses in their neighborhood are vacant and boarded up, with a lawn that looks like hell, it brings everyone else's home value down.
All this stuff that Obama has been talking about really does not address this problem. Instead of throwing money at Wall Street, which is what Bush did and what Obama continued to do, they should have imposed a moratorium on housing foreclosures. They should have said, "OK, Wall Street, we'll help you, but you are now going to be forced (through bankruptcy courts and new rules we're going to put in place) to adjust people's mortgages so they can stay in their home."
Spending $50 billion on infrastructure, as Obama has recently proposed, is chump change compared to, say, the $300 billion of toxic investments made by one bank, Citigroup. (After he left the Clinton administration, Rubin became a top executive at Citigroup, whose $300 billion worth of investments were made possible by the reversal of Glass-Steagall, a reversal for which he, Rubin, was in large part responsible.)
Three months after Robert Rubin had given a speech at Cooper Union saying we had no financial problem and no crisis, Obama, at that same Cooper Union, acknowledged that this crisis is all due to the reversal of Glass-Steagall — all due to reckless, radical deregulation. He spelled it out. And then, mysteriously — well, maybe not so mysteriously when you consider that Wall Street and the larger financial community became his biggest campaign contributors — he, Obama, turned to the disciples of Robert Rubin (e.g. Lawrence Summers, Timothy Geithner and the very people who had, with Rubin, created this mess) and naively ordered them to "Fix all this." And of course they haven't fixed any of it! Instead they've taken care of their buds on Wall Street . . and mugged Main Street.
What could Obama do, starting today?
He could immediately push to give bankruptcy courts the power to force the banks to readjust these mortgages. We the taxpayers bailed out the banks. So why shouldn't they in turn be compelled by the federal government to return the favor by helping taxpayers who are now stuck with a house worth less than what they owe on their mortgage? As already mentioned, abandoned houses bring down the value of all surrounding houses, underwater or not, so everyone would thereby be helped.
The Tea Partiers yell about "getting the government off our back." But this government did not get big (and the debt did not rise as high as it is) due to the fact that we're trying to help firemen or school teachers keep their jobs. It happened because we have, through the Fed and through the federal government, committed three or four trillion dollars to bail out the banks.
Therefore Obama should call for a moratorium, for two or three years, on mortgage foreclosures. He could call for, and push through, legislation that would allow people to stay in their homes. The goal would be to prevent all those boarded-up buildings in the suburbs of South Florida, Riverside, California, and elsewhere.
If you travel in this country and look closely, you'll see that there's enormous pain stemming from the fact that people's life savings as well as their sense of their worth, their piece of the American Dream, were tied up in their family home. When you lose that home or when you're facing foreclosure, you lose not only your pride, you lose your ability to retire and/or to send your kids to college.
The dreams of Americans are wrapped up in their home. And I don't know why we're talking about anything else right now. If we want to get the economy going again, if we want to get people back to work, if we want to get consumption up, what you've got to do is help people with their nest and their nest egg, which is their home. And so far there's precious little in Obama's speeches, and certainly almost nothing in his actions, to help those homeowners in that way.
Fannie Mae and Freddie Mac were as rapacious as Citigroup or Goldman Sachs. People like Barney Frank, and even many in the Black Caucus, said, "No, no, don't touch Fannie Mae and Freddie Mac because they're going to help poor people get into homes." Sure, a lot of minorities got into homes, but many of those homes were lost to foreclosure. So now, as a result of such a bad investment, plenty of folks have lost their life savings (to the banksters and Wall Street sharpies).
If we can't stop housing foreclosures, if we can't stem this bleeding right now, we're simply not going to get consumption and spending back, and so we're not going to get anywhere near enough jobs back — jobs in construction, and jobs generally. Therefore one should not divide the interests of homeowners, and keeping them in their homes, from the interests of the rest of the population.
Has Obama done anything different about the economy than Bush?
Obama has been a disaster. Perhaps if he would appoint Elizabeth Warren to the new consumer protection agency, there will be a bit of value in this new regulatory agency. Problem is, there's a quiet campaign in the White House and at the Treasury Department, among people like Wall Street guardians Rahm Emanuel and Tim Geithner, to prevent her from getting this appointment.
Unfortunately we can't look to the Democratic Party, hacks that they are, for leadership on this. First of all, most of these people are veterans of the Clinton administration and are the same people who destroyed Brooksley Born, who was one of the most competent lawyers in this country in dealing with banks. She understood more about derivatives than anyone around, and she was appointed to what was supposed to be a lesser agency, the Commodity Futures Trading Commission.
Seventeen times, in testimony before congressional committees, Brooksley Born sounded the alarm that there was going to be a housing meltdown, that this whole thing had gone wild, and that we had inadvertently enabled Wall Street graft and corruption.
It is people like Summers, now firmly entrenched in Obama's administration, who don't want Elizabeth Warren — Timothy Geithner, for instance, and there are plenty of others. There are many Goldman Sachs veterans and other big Wall Street veterans entrenched in Obama's administration. They destroyed Brooksley Born, and now they feel threatened by Elizabeth Warren because Elizabeth Warren all too competently represents consumers. She's a brilliant legal mind who scares them just as Brooksley Born did.
Elizabeth Warren said, "Wait a minute, what kind of government is it when you're caring about Wall Street and you're ignoring the pain out there on Main Street?" And banksters don't want to hear that kind of talk. They want unprotected consumers in the millions who they can then more easily prey upon en masse, and profit from, obscenely. Their successful predation and the growing wealth that stems from it depends on having consumers remain unprotected. And nothing else matters to them. Therefore Elizabeth Warren must be stopped. Discretely stopped, but stopped.These folks on Main Street invest their whole life providing shelter and all manner of other basics for their family. And when you go out in these communities, it's so very depressing. There are people in Riverside, California, who diligently cleaned office buildings 50 miles away in Long Beach. They commuted every day from Riverside so their kids could live in a better neighborhood. They bought their affordable house in a nice neighborhood, worked hard, and reliably made the payments month after month. They did everything they were supposed to do. And then they lost their jobs to lower-wage workers from south of the border, mortgages started getting foreclosed and the neighborhood went to hell, and they eventually lost everything.
And that story is being repeated millions of times across America, as the wealth holdings of the banksters and CEOs multiply into the stratosphere.
And the guys who did this to America, they weren't those vicious right-wingers. It wasn't all the people that we liberals like to attack. It was our friends! Let's get that straight: This was a product of the Clinton Bubble. It was our friends who helped make it happen. It was people like the heads of Fannie Mae and Freddie Mac, who identify themselves as liberal Democrats. But they were being rewarded with enormous bonuses. (In fact they made out just as well as the people running Citigroup.)
And the fact of the matter is that the damage that was done to America was done by people who talk a very good game. Robert Rubin contributed money to the Harlem dance group. Jesse Jackson was one of those who supported the reversal of Glass-Steagall. It was the Clinton Democrats (who now run the Obama administration) who turned the henhouse over to the foxes. And the record of Obama on this has been abysmal. He has essentially been a front man for Wall Street. Why? Because he thinks he needs their money to get re-elected in 2012.
A quote from a 1924 edition of the American Bankers Association Journal sums up what is currently happening: "When, through the process of law, the common people lose their homes, they will become more docile and more easily governed through the strong arm of government applied by a central power of wealth under leading financiers. These truths are well known among our principal men who are now engaged in forming imperialism to govern the world. By dividing the voter through the political party system, we can get them to expend their energies in fighting for questions of no importance." [This quote is also attributed to the Bankers Manifesto of 1892.]The alternative press leads on the policy roots of the credit crisis
Columbia Journalism Review
Originally Published on September 24, 2008
The alternative press has led the way on the story of Phil Gramm [who served as a Democratic Congressman (1978–1983), a Republican Congressman (1983–1985) and a Republican Senator from Texas (1985–2002)] and the policy roots of the financial crisis, beating the mainstream business and other media rather badly about the face and neck.
Why this would be so is a subject for group psychologists, anthropologists, social workers, ethnographers, drug counselors, and media critics like us, and certainly another day. But with an election around the corner, we would suggest only that it is as much a mistake for journalists as it is for voters to assume that past policy decisions are unrelated to our current predicament.
So, let’s accentuate the positive and offer an Audit Credit to Mother Jones for more excellent reporting on the ever-widening ripples from the deregulation of the American financial system, which allowed, as it invariably does, the bad money to drive out the good.
James K. Galbraith examines the bubble effects of this deregulation, looking beyond the obvious one in housing, already burst, to the other ones in energy and food. As his colleague David Corn did last summer, Galbraith lays considerable responsibility for financial deregulation at the feet of former Senator Phil Gramm. But, unlike Corn’s also Credit-worthy piece, Galbraith shifts his focus to a specific result of that deregulation: the speculation that has resulted in high commodities prices.
Galbraith’s analysis is nuanced. He does not blame high energy and food prices solely on speculation, but he does expose as a myth the idea that high prices are the result of tight supply and high demand alone. He states bluntly:
Yes, Virginia, speculators can affect the price—if they are large and relentless enough to dominate a market, and especially if they can store the commodity and keep it off the market as the price rises.
Here is where deregulation comes in, because it has given speculators their outsized power. Deregulation has meant that speculation is not a fringe activity, but has rather become a mainstream investment strategy. Here is Galbraith:
Thus today, when officials like Treasury Secretary Henry Paulson say that speculation is not a factor in the commodity markets, they’re not counting hedge funds and investment banks as speculators—even though that’s what they really are.
Galbraith is hardly the only one to raise the issue of speculation and high oil prices, but he distinguishes himself by looking at the larger picture: energy speculation as one facet of broader, and disastrous, deregulation.
In Galbraith’s and Corn’s pieces, Mother Jones makes it clear that if you are looking for someone to thank for this situation, you wouldn’t be wrong to send your regards to Phil Gramm.
Gramm threw his weight behind the Commodity Futures Modernization Act of 2000, which, among other things, paved the way for a boom in those nasty credit default swaps that are coming back to haunt us all. Writes Galbraith:
This, combined with other deregulatory moves by the CFTC [Commodity Futures Trading Commission], broadened the ‘swaps loophole,’ an enormous backdoor into the commodities markets, basically permitting speculators making bets off the commodities exchanges to be treated as ‘commercial interests’—like say, farmers—and hence avoid the scrutiny (including limits on the size of their bets) normally applied to financial players.
And, as is better known, Gramm also co-sponsored 1999 legislation—backed by the Clinton Administration—[the Gramm-Leach-Bliley Act, which repealed portions of the Glass-Steagall Act] that collapsed the distinction between investment and commercial banks.
For a view of where both pieces of legislation fit into the financial crisis, take a look at this clear timeline that appeared in Mother Jones last summer.
In the interest of credit where credit is due, we note that Mother Jones, while notable for its force and persistence, was not the first publication to have looked closely at Gramm’s history. Credit also goes to The Texas Observer, where a rigorous article by Patricia Kilday Hart, from last May, pinpoints Gramm as an architect of the financial crisis. Here is Hart on the circumstances of the 2000 legislation:
In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call ‘a stunning departure from normal legislative practice,’ the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm.And did it ever.
There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment—also known as the Commodity Futures Modernization Act—along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.
In a reminder that the core circle of Gramm critics is a somewhat select bunch, the Texas Observer quotes both Galbraith and former government regulator Michael Greenberger, another name that appears prominently in what there is of Gramm coverage. (We’ve flagged an interview with him further down.)
But we can also see the widening influence of these ideas in pieces like this one from last July. Dave Davies, of the Philadelphia Daily News, chose to spend his “few minutes with McCain” asking about the fact that:
His campaign co-chair and economic advisor, former Texas Sen. Phil Gramm, was co-sponsor of the 1999 law that allowed commercial banks to get into investment banking. And the fact that Gramm was a prime architect of a 2000 bill that kept regulators’ hands off ‘credit default swaps.’
McCain’s answers are unenlightening. But what is important is that this local reporter asked the question. What inspired him? Well, he didn’t mention any publication by name, but he appeared to give Mother Jones and The Texas Observer a nod when he explained,
“Liberal writers raised this issue a month ago.”
The fact is, both the Mother Jones pieces and the Texas Observer piece are part of a small but important batch of articles appearing over the past several months that examine Gramm’s place in financial deregulation, and the resulting effects of that deregulation on the economy. Mother Jones and the Observer stand out for their depth and focus, but other pieces that at least place Gramm in context include an excellent April 2008 interview on Fresh Air with Greenberger, and a March 2008 New York Times piece that focuses on deregulation more broadly but does mention the former senator.
As a side note, press criticism of Gramm has not gone unnoticed in Washington. On Sept. 17, Vermont’s Bernie Sanders demonstrated that politicians—or at least their aides—do scan the press. He went to the trouble of reading to Congress a Sept. 15 post by blogger Peter Cohan criticizing Gramm’s deregulatory schemes, and he also mentioned The Texas Observer. In addition, Democrats have compiled an information sheet on Gramm that is based in substantial part on press coverage.
In other words, information is out there for those with the motivation to look for it.
The effect of these articles in the political arena remains to be seen. But it is worth noting that the current crisis is not the first time the press has focused on Gramm and deregulation.
To bring in recent history: Gramm and his wife, Wendy, did get some high-profile attention—from an eagle-eyed Public Citizen, then The New York Times, The Chicago Tribune (“Sen. Gramm and Wife Deregulated Enron, Benefited from Ties,” Jan. 18, 2002, Robert Manor), The Washington Post (“For Gramms, Enron Is Hard to Escape,” Jan. 25, 2002, Dan Morgan and Kathleen Day)—several years ago, after the Enron debacle and California energy crisis, for their roles in energy deregulation. But, as will happen, the hubbub died down.
Before it did, some reporters—in the NYT and the WSJ (“Out of Reach: The Enron Debacle Spotlights Huge Void In Financial Regulation,” Michael Schroeder and Greg Ip, Dec. 13, 2001), for example—widened their view, to address the problem of deregulation beyond the energy market. But the job of piecing together Gramm’s role in broader financial deregulation would largely fall to later reporters. Like Hart in The Texas Observer and Galbraith and Corn in Mother Jones.
All this is to say that while Gramm’s role in deregulation has not received the attention it deserves, neither has it gone away. Rather, it forms an undercurrent to the press’s effort to present the larger story of financial collapse.
And lastly, we come full circle: Another place the story has popped up again in recent days is on Mother Jones’s website, where David Corn returned to the topic September 15. He elaborated on suspicions about an ongoing connection between Gramm and McCain:
Gramm is responsible for the rise of the wild and wooly $62 trillion swaps market. And he was chairman of the McCain campaign and a top economic adviser for McCain—until he dismissed Americans worried about the economy as ‘whiners.’ After that comment, McCain dumped Gramm. But was Gramm truly excommunicated from McCain land?
This is pretty much a rhetorical question. And to back up his point, Corn goes on to offer evidence that Gramm appears to be “back in the good graces of the McCain campaign.”
All the more reason why the press needs to keep Gramm in its sights.