Saturday, January 1, 2011

A Short History of Financial Deregulation

            Without a formal Congressional effort to understand, the complete details of who, how, when, where and why the American economy tanked, creating an unemployment recession to rival the 1929 crash may be lost to history.  What we do know is that sufficient regulatory brakes were repealed by Congress in the decades prior thereby preventing what became a gargantuan locomotive steaming wildly down the tracks with no engineer in the cab. 

            A national economy of  booms and busts, panics, recessions and depressions occurred with increasing frequency until the Panic of 1907 brought the recognition that the country’s financial structure no longer served a growing industrial base and its complex monetary requirements.

            Adoption of the Federal Reserve Act of 1913 by President Woodrow Wilson established one central bank with the power to issue currency, control interest rates and establish regional branches to be controlled by a publicly accountable Board of Directors.  Sold to the American public as sure to bring stability and certainty to the country’s financial sector, the stock market crashed 16 years later creating the longest, most widespread and serious global financial depression.

            Upon election in 1932, Franklin D. Roosevelt hit the ground running with a series of New Deal legislative initiatives including the Banking Act of 1933 (aka Glass-Steagall Act) which separated riskier investment banking from infecting the more mundane commercial banking industry.  G-S also established the FDIC (Federal Deposit Insurance Corporation) as government’s guarantee to protect small depositors and the Securities Exchange Commission to regulate and provide oversight on investment banks.

            After passage of G-S, the country experienced its longest period of stability ending wild speculation, market fluctuations and sudden fiscal losses until the 1980’s when President Ronald Reagan, a believer in a weak central government and laissez faire policies which had been discredited after the 1929 market crash, combined tax cuts for the rich with a ‘trickle down’ economy that embraced deregulation.  Reagan's financial deregulation mania included appointment of Alan Greenspan as Chair of the Federal Reserve in 1987.  Hostile to all regulation, Greenspan continued the dismantling of Glass Steagall that had already begun with the

Depository Institution Deregulation and Monetary Control Act of 1980 phased out interest rate ceiling on S&L's, allowed S&L's to serve beyond state limits and accept deposits from large institutional investors and increased Federal government liability on deposits from $40,000 to $100,000.  

Depository Institutions Act of 1982  eased regulations on Savings & Loan’s to expand loans beyond mortgages and allowed S&L's to gamble on high risk investments while allowing one large institutional investor to ownership.  The Act also allowed adjustable mortgages rates for the first time.  

Tax Reform Act of 1986 created a new market for investment banks with tax advantages on mortgage backed securities. 

           The Reagan Administration worked around a Democratic House by cutting funds and staff to regulatory agencies making enforcement impossible and by appointing enfeebled regulators who stalled, equivocated and otherwise thwarted Congressional will.   By the time Reagan left office, the Federal debt had grown from $930 billion in 1980 to $2.6 trillion in 1988 and the gates of government were opened to irresponsible speculation and conspicuous corporate influence.  In 1982 with 800 Savings and Loan banks on the brink unable to meet its net capital requirements, the Reagan Administration allowed an inflation of their capital to stay in business     

          During the 1980’s and up to 1992, 2,500 banks and S&L’s failed.  Elected in 1988, President George H.W. Bush did his share to continue reckless behavior by enacting the Financial Institutions Reform, Recovery and Enforcement Act 1989 which authorized $293.8.billion of public money to failed S&L’s, modernized Fannie Mae and Freddie Mac to provide home ownership opportunities to low and moderate income families and created an Office of Thrift Supervision responsible for oversight on companies like  AIG and Countrywide.   Upon adoption, President Bush promised that the Act would “safeguard and stabilize America’s financial system and bring permanent reforms so this will never happen again.”
  • Federal Deposit Insurance  Corporation Improvement Act of 1991 - Goldman Sachs influenced the language to allow the Fed to provide crisis loans without concern for collateral thereby encouraging further speculation without regard to consequences.
          By the time Bush (the father) left office in 1992, the federal deficit had risen to $4 trillion.

          Neo-Democrat Bill Clinton’s election in 1992 ushered in a booming era of prosperity for 8 years creating millions of new jobs with record low unemployment and inflation while boosting home ownership to historic levels.   As the creation of new financial institutions that began under Reagan continued to spread, Clinton’s Treasury Secretary Robert Rubin presided over a zealous rush of unfettered corporate greed and escalating profits that welcomed the financial services industry into the inner circles of government and the halls of Congress as if they owned the place. 

            The damaging effect of three major Clinton initiatives (the ‘end of welfare as we know it,’ fast track free trade agreements and final repeal of Glass Steagall) on the American public during the 2008 recession deserve to be explored in some depth on another occasion.

.           The Clinton Administration’s support with financial industry began with the Interstate Banking and Branching Efficiency Act of 1994 which eliminated restrictions on interstate banking allowing new branches and coast- to–coast conglomerate banking

            But what may be the single most egregious act by the political elites was the long-sought repeal of the Glass Steagall Act when the Financial Services Modernization Act of 1999 aka Gramm Bliley Leach Act was adopted.   With one swipe of a pen, Clinton struck down the 75 year single barrier preventing insurance companies, commercial and investment banks from merging stating that repeal "will strengthen the economy and help consumers, communities and businesses across America."   Not unlike the 1920's, repeal of Glass Steagall created an  extravagant atmosphere of liberation with the entire country caught up in a heightened euphoria fashioned by the wheeler-dealers who had no understanding of how thin the ice would become – and most of the political power elites went along.      
  • In 1999, the Senate voted 90 – 8 in favor of repeal with 7 Dems including Sens.Boxer (Ca), Bryan (Nv), Dorgan (SD), Feingold (Wis), Mikulski (Md), and Wellstone (Mn) and 1 R. Sen. Shelby (Ala) against and the House voted 362-57 in favor with 51 Dems and 5 R's voting No.
The removal of Brooksley Bourne as Chair of the CTCF for attempting to regulate financial derivates has been thoroughly documented on PBS’ Frontline in ‘The Warning.”  Here’s the link:  
  • Commodity Futures Modernization Act of 2000  allowed US to maintain leadership role in emerging international markets with language inserted by Sen. Phil Gramm (T) assuring that all derivatives should be exempt from any Federal regulation or oversight.
          By the time Clinton left office in 1999, there was a budget surplus of $300 billion – but the long term damage was yet to reveal itself. .   

           President Barak Obama’s 2009  ‘sweeping overhaul on a massive scale not seen since reforms of the Great Depression’ offered, in truth, incremental changes that did little to assure capitalist competition as over 1500 lobbyists created enough loopholes to sufficiently denigrate the legislation.

            The financial services industry, now firmly entrenched in the Washington power structure, demand the best of both worlds.  Not hesitating to grab billions of public money in 2008 to save their asses, the Wall St. crooks continue to demand no regulatory interference and at the same time, total assurance of a government safety net.

            Within the deterioration of a two party system that created a generation of professional effete politicians, a fair observation is that few elected officials have adequately performed their fiduciary responsibilities to the American taxpayer.

No comments: