The current financial disaster was enabled by two Bills pushed through Congress by a Republican Senator and signed, without demur, by a Democratic President.
The summer has come and passed. The innocent can never last, Wake me up when September ends.
Green Day, American Idiot, 2005.OVER the weekend of September 13-14, three events of differing magnitudes occurred: a natural disaster, a financial disaster and a loss that reminds us of things that might come. Hurricane Ike smashed into the Gulf Coast of the United States, devastating the island community of Galveston, Texas. It reminded the people of the region of the awesome power of nature. Along the finger of land that runs from Port Arthur to Galveston, an area filled with oil refineries, sits the small town of Gilchrist. Kathy Rush of the towns Volunteer Fire Department said after the hurricane passed: Crystal Beach looks like somebody set a bomb off. For the most part houses are levelled. That same day, in New York City, the venerable investment house Lehman Brothers declared bankruptcy. The New York Times Andrew Ross Sorkin captured the mood in his dispatch about the fall of Lehman, the rescue of the mortgage giant American International Group and the absorption of Merrill Lynch by Bank of America: The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments. The New York Times copy editors would ordinarily have disallowed so many compound prepositions (because of, as a result of).
Television, radio and print journalists have had to call upon experts of all kinds to help explain what has happened. Economists, ex-government officials, denizens of the think-tank world, anyone with a passing familiarity with the shadow banking system pass muster. If academics came under fire for the turn to jargon a few years ago, the problem of opaqueness is now on the side of the financial world. The universal illiteracy of the population about financial concepts is surely a testament to the undemocratic way in which the world of finance operates.
Some of the more commonplace ideas, such as insurance, are here disguised as credit default swaps. The countrys wealth (in the form of savings and pensions) is parked in the financial markets, and yet most of us know abysmally little about the workings of Wall Street and its self-fashioned masters of the universe. Occasionally, we hear of the massive pay packets that these masters take home, and of their slogans such as greed is good (adopted by the bankers in Oliver Stones 1987 movie, Wall Street, which attempted to be critical of their values and lifestyle). But what the masters did with our money was not questioned as long as the rate of return on our money market funds or pension plans was sufficient. As the consequences of hubris come knocking, the masters duck for cover and the rest of us must take a hasty tutorial in the science that squandered our savings.
The day after Lehman went down, Democratic presidential candidate Barack Obama went for the jugular. I certainly dont fault Senator McCain for these problems, he began. But I do fault the economic philosophy he subscribes to. Its a philosophy weve had for the last eight years one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. Its a philosophy that says even common-sense regulations are unnecessary and unwise and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.
John McCain began the day by saying that the fundamentals of the economy are strong. As the hours went on, and as Obama pummelled him for this line, McCain backed off, running a hastily produced advertisement that began: Our economy is in crisis.
Obama rightly raised the problem of deregulation but his history was truncated. Saying that this is a problem of the George W. Bush administration (the last eight years) exculpates his own partys role over the past several decades in the evisceration of the New Deal. It was during the Bill Clinton administration that the pillars of regulation came down and freed up investment banks to operate with minimal supervision. The man who led the charge in the U.S. Congress, Senator Phil Gramm of Texas, is a Republican, but his several Bills came before President Clinton (a Democrat), who signed them without demur. The two most significant Bills came before Clinton at the end of his term. In November 1999, Gramm pushed through the repeal of the 1933 Glass-Steagall Act (which had ensured a separation of the work of commercial and investment banks and set up the system of federal regulation of the work of the financial sector). Because of the repeal of this Act, banks could freely create and trade mortgage-backed securities and collateralised-debt obligations, both responsible for the current imbroglio.
Late into the night of December 15, 2000, Gramm attached a 262-page amendment to an already 11,000-page government reauthorisation Bill. The Senators, eager to get home for the Christmas break, passed the Bill without either reading it or debating it. This Commodity Futures Modernisation Act of 2000 produced the shadow banking system. Clinton signed both Bills.
For economic advice, Clinton turned to Robert Rubin, who made his fortune at the risk arbitrage division of Goldman Sachs. Rubin joined Clintons administration as a policy adviser and was the Treasury Secretary in the second term. Rubins tenure was marred by conflicts of interest. Rubin counselled Clinton to push for the North American Free Trade Agreement or NAFTA (1994), and to bail out Mexicos banks (1998), both acts greatly benefited Goldman Sachs, Rubins former employer. Goldman underwrote Mexican bonds and the privatisation of Mexicos telephone company. Rubin left the Treasury in July 1999 to join Citigroup in November. Two years later, Citigroup acquired Mexicos major bank, Banamex, a sale facilitated by NAFTA.
In addition, the repeal of Glass-Steagall is derisively called the Citigroup Authorisation Act because the new law allowed for the creation of this new firm, which combined insurance, investment banking and commercial banking. Rubin is now an adviser to Obama. The Republicans have their fingers dirty as well. McCains official economic adviser and campaign co-chair was Gramm, the man who led the charge for the reforms. He had to resign from his post when he called America a nation of whiners and whinged about the onset of a mental recession. He remains in direct contact with McCain and is on the shortlist to be his Treasury Secretary.
Henry Paulson, Bushs current Treasury Secretary, like Rubin, comes from Goldman Sachs (he continues to hold $523.5 million in the companys stock). It is widely assumed that the $700 billion bailout package (privatise the gain, socialise the pain) will lift the ailing stock of Goldman and so protect Paulsons own money and that of his former colleagues. More than that, the plan put forward by Paulson and the Bush administration seeks to protect them not only from oversight but also from prosecution in the case of wilful mismanagement.
The draft of Paulsons proposed Bill says quite bluntly: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
The idea that the federal government wants Congress to hand over $700 billion without strings has finally given the Democrats some backbone. Senator Christopher Dodd, who has himself been dogged with allegations that he got a favourable rate from a mortgage dealer, pushed back against the Bush administration with some force. The Bill, he said, would do nothing to help even a single family save a home. It would do nothing to stop a single CEO from dumping billions of dollars of toxic assets on the backs of taxpayers and walking away with a bonus and a golden parachute. And it would allow [Secretary Paulson] to act with utter and absolute impunity without review by any agency or court of law. After reading this proposal, I can only conclude that it is not just our economy that is at risk but our Constitution as well.
The Republican Study Committee, a group of elected officials of the hard Right, wrote to Paulson saying that the bailout is a dangerous and unmistakable precedent for the federal government both to be looked to and relied upon to save private sector companies from the consequences of their poor economic decisions. Social democracy and libertarianism come together to halt the bailouts jus primae noctis.
When the Richard Nixon administration tried to undo the Glass-Steagall Act in the 1970s, the U.S. Supreme Court defended the Act, saying it worried about the subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business (Investment Company Institute vs Camp, 1971).
The consumer advocate Ralph Nader has offered much the same kind of warning for the past 30 years. Most recently, in September 2006, Nader wrote to the Chair of the Securities and Exchange Commission, Christopher Cox, warning him of the mismanagement at various government-sponsored mortgage houses.
When Nader wrote to Congress in July this year warning it that the bank insurance fund was depleted, Representative Spencer Bachus (Republican) told a hearing in reference to this letter: Our banks are well capitalised, our deposit insurance fund is sound. Theres absolutely no factual basis for saying that theres not money there to pay. Not two months later, the bank insurance fund lay empty.
The third event of September 13-14 was the death of Ralph Naders running mate for the 2004 presidential election, Peter Camejo. My few meetings with Peter always left me intellectually energised. In 2003, Peter drafted The Avocado Declaration, which provides a fair summary of the political crisis the U.S. faces at present. An extract from Peters Declaration will be the last words in this column, written in his memory:
The Republican Party has historically acted as the open advocate for a platform which benefits the rule of wealth and corporate domination. They argue ideologically for policies benefiting the corporate rulers. The Republicans seek to convince the middle classes and labour to support the rule of the wealthy with the argument that Whats good for General Motors is good for the country, that what benefits corporations is also going to benefit regular people. The Democratic Party is different. They act as a broker negotiating and selling influence among broad layers of the people to support the objectives of corporate rule.
The Democratic Partys core group of elected officials is rooted in careerists seeking self-promotion by offering to the corporate rulers their ability to control and deliver mass support. And to the people they offer some concessions, modifications on the platform of the Republican Party. One important value of the Democratic Party to the corporate world is that it makes the Republican Party possible through the maintenance of the stability that is essential for business as usual. It does this by preventing a genuine mass opposition from developing. Together the two parties offer one of the best frameworks possible with which to rule a people that otherwise would begin to move society towards the rule of the people (i.e. democracy).
