A BUZZFLASH NEWS ANALYSIS
by Meg White
In tough times such as these, it can be comforting to slip into nostalgia and fantasy, which has got me thinking about Congress in late 1999. Lawmakers were falling all over themselves praising the passage of the landmark Gramm-Leach-Bliley Act, which effectively repealed much of the Glass-Steagall regulations on financial institutions coming out of The Great Depression.
Former Sen. Phil Gramm (R-TX), the main architect of the legislation, expressed fatherly pride in the bill in his floor speech at the time (recently brought to our attention by Tom Wieliczka of Windsor Locks, CT):
"The question is, 'How will it look 50 years from now when it has gone from infancy to maturity?' Obviously, after setting out a dramatic change in public policy, it is fair to set out a test for determining its success," Gramm said. "Ultimately, the final judge of the bill is history. Ultimately, as you look at the bill, you have to ask yourself, 'Will people in the future be trying to repeal it, as we are here today trying to repeal -- and hopefully repealing -- Glass-Steagall?' I think the answer will be no. I think it will be no because we are doing something very different from Glass-Steagall. Glass-Steagall, in the midst of the Great Depression, thought government was the answer. In this period of economic growth and prosperity, we believe freedom is the answer."
Thankfully, we didn't have to wait 50 years to find out what history would say about Gramm's "dramatic change in public policy." It only took a decade for our financial industry to show the weakness of his extremist deregulation argument.
The fantasy ingredient of my coping mechanism cocktail has to do with who the media and the American people could have listened to at the time. Reading The New York Times article published when the act passed, you get the idea that the people who were opposed to this legislation were just downers that didn't want banks to make money:
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''
Dorgan's comment here is remarkably prescient. What would have happened if we had better heeded his warning?
To be fair, another Democratic senator expressed worry over the act in that Times article: the late Paul Wellstone of Minnesota. But, come on. That guy was always doom-and-gloom. He also predicted that the war in Iraq would lead to untold loss of life and resources, a rise in oil prices, al Qaeda's use of American aggression as a recruitment tool, and the weakening of U.S. efforts in Afghanistan. Shows what he knew.
Gramm's response came in the form of a Feb. 20, 2009 Wall Street Journal op-ed piece. In it, he blames the meltdown on two things: low income borrowers who bit off more house than they could chew and the Community Reinvestment Act (CRA) of 1977. He insists that banks were forced by this 30-year-old law to hand out subprime loans like candy. While Gramm's effort to blame a "nation of whiners" for what has become a bit more than the "mental recession" he predicted last year is not surprising, it is indicative of the bullheaded demagoguery that got us into this mess.
There's no shortage of reasons that Gramm's argument against the CRA is patently false (the majority of subprime loans came from financial institutions not covered by CRA, the explosion of subprime loans came after the Bush Administration severely weakened the CRA, CRA loans have been found to have lower interest rates and fairer terms than those not covered by the law, etc. For an excellent aggregation of facts and links to stories about this bogus argument, check out this article from Business Week). And there's a whole slew of economists who blame much of the crisis on Gramm-Leach-Bliley and deregulation in general.
Of course, Gramm declines to mention the fact that after he left the Senate, he earned hundreds of thousands of dollars lobbying Congress to relax banking and mortgage lending regulation.
Gramm also tries to change history in his Wall Street Journal defense:
"Moreover, GLB didn't deregulate anything," Gramm wrote, arguing that Gramm-Leach-Bliley created more regulation. But that's not what he was saying at the time. Again, from that same floor speech at the time of the bill's passage:
This is a deregulatory bill. I believe that is going to be the wave of the future. Although this bill will be changed many times, and changed dramatically as we expand freedom and opportunity, I do not believe it will be repealed. It sets the foundation for the future, and that will be the test.
Gramm was right. Gramm-Leach-Bliley did set the foundation for the future: the future financial crisis. Gramm's floor statement at the time was filled with limitless optimism and several huge blind spots. The Gramm-Leach-Bliley Act allowed all kinds of institutions -- even insurance companies such as AIG -- to get into the risky investment game. How he can continue to keep his eyes squeezed shut during this financial meltdown, I'll never understand.
Even right-wing pundits are starting to open their eyes. Conservative New York Times columnist David Brooks writes today about a split in belief about the origin of the American financial crisis into two theories: the "greed narrative" and the "stupidity narrative." Basically, the greed theorists believe that big banks, when allowed to diversify thanks to deregulation, took on as many assets, toxic or no, that they could stuff in their pockets. The stupidity camp says that it's OK that they were allowed to diversify and buy, buy, buy. They just were too stupid to understand what they were purchasing and how much it was worth.
Now, it may come as no surprise that Brooks is on the side of stupidity. However, he showed an uncharacteristically flexible application of logic when he admitted where the two schools of thought merge:
Both schools agree on one thing, however. Both believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions -- when savings banks, insurance companies, brokerages and investment banks lived separate lives.
In other words, we should return to the day before Gramm-Leach-Bliley. Basically what Brooks is saying here is that no matter who you believe about the origins of this mess, it's clear that something needs to be done about breaking up these giants of the financial industry.
Maybe if we had forced AIG to just insure stuff instead of heading off to the casino, things would be more stable right now. But perhaps instead of fantasy and nostalgia, I should be counting my blessings. Congress seems poised to pass legislation to better regulate the runaway financial industry.
And things could have been much worse. After all, had McCain won the presidency in November, it was widely speculated that he would have named Gramm as his treasury secretary. Now that's a scary thought.
A BUZZFLASH NEWS ANALYSIS