If you only listen to conservative political commentators, you get the idea that the banking crisis was caused by liberals. They compelled banks, so the story goes, to make millions of high risk loans to low income borrowers, most of them black and Hispanic, who later defaulted on these loans. If you like a simplistic analysis, there it is- all framed and predigested for Rush’s dittoheads, Howie Curmudgeon acolytes and Bellicose Bill O’Reilly  enthusiasts. No further discussion necessary for these folks.

Here’s the rest of the story: the lion’s share of blame for the looting of our financial institutions rests firmly upon the Republicans, who have been enthusiastic architects and promoters of deregulation. Reagan, Bush, Phil Gramm, Allan Greenspan and others rode the deregulation bandwagon. John McCain was still touting deregulation as late as last month.

To find out why, we have to go back to the banking failures that followed the stock market crash of 1929. In order to restore confidence in the banking industry, Franklin Roosevelt’s administration enacted legislation to regulate banks. In the early 1930’s, the Glass-Steagall and Bank Holding Company Acts  prohibited banks from engaging in conflicts of interest, pyramid schemes,  commingling of funds, leveraging and speculation. The act prohibited savings banks from merging with investment banks and mandated frequent government audits, all of which contributed to the sound banking practices that lasted until the Reagan administration. If you are over 40, you remember when the banking industry was the most ultra conservative, traditional, and boring industry imaginable- in other words, the ideal people to trust with your money. And people did trust them. Nobody questioned the integrity of banks because the industry was regulated.

 The fever for deregulation grew in the 1980’s from Ronald Reagan’s promise to “get government off our backs.” Deliriously happy throngs cheered Reagan as he pledged to clear the way for his vision of “Morning in America.” Those nasty liberals had created all those barriers to commerce. If we just removed the offending regulations, the awesome power of free markets would be unleashed. And so Reagan deregulated banks with the Garn-St. Germaine Act of 1982, much of which was written by lobbyists for the financial industry. The resulting orgy of greed and looting was so rampant that even loan sharks, shady real estate developers and gangsters were purchasing savings and loan institutions, granting themselves massive loans, and then defaulting on them. (Is that what they mean by free markets?) Within a decade, the savings and loan crisis resulted in a 500 billion dollar bailout.

Deregulation should have ended then, but it didn’t. Big business wanted even more banking regulations lifted and they spent millions of dollars lobbying for it. Perhaps no one was more a champion of deregulation than Republican Senator Phil Gramm, the banker’s friend. After 12 attempts in 25 years, a Republican congress (with the help of President Clinton) finally brought down the Glass-Steagall Acts. A law co-authored by Gramm repealed the offending, old-fashioned banking regulations which had been in place since the 1930’s. Gramm was handsomely rewarded for his help by his banking benefactors.

Gramm also sponsored the Commodity Futures Modernization Act of 2000, which deregulated the energy industry.  Enron lobbyists wrote most of the bill, (Do you notice a pattern here?) which accounted for the loophole exempting Enron from energy trading regulations. In just one year, the loophole allowed speculators to plunder 11 billion dollars from California. In return for his services, Gramm was the second largest recipient of campaign donations from Enron.

You might think that a man who single handedly almost brought down the entire Unitrd States banking system would show some humility, but in July Gramm accused the American people of “whining” and stated that the nation’s economic woes were not real, but “mental.” Gramm said nothing about the whining of the financial industry which comes begging to the American taxpayers once again with its empty cup.

You might think that such an exemplar of incompetence and dishonesty would be reviled, censured, perhaps held up to ridicule, but today, Gramm serves as co-chair of the McCain presidential campaign. Since retiring from the Senate, Gramm has secured a lucrative position as vice president of UBS/Switzerland, the world’s largest private bank. And until recently, Gramm was being seriously considered by John McCain for the post of-are you ready for this? ...Treasury Secretary.

Are you surprised or shocked that we might face a Latin American style era of runaway inflation? I’m not. Thomas Jefferson faced these same kinds of problems with banks as did Andrew Jackson. In 1837, Abraham Lincoln had this to say about banks: “These capitalists generally act harmoniously, and in concert, to fleece the people, and now, that they have got into a quarrel with themselves, we are called upon to appropriate the people's money to settle the quarrel." This is old stuff and we should have known better by now. Maybe before the next bank bailout twenty or so years from now, someone will have thought about regulating the banking system, but I doubt it. Most people never learn from the past.

October 2008