Bankers Run Amok
The Politics
To stave off financial collapse, the Federal Reserve and the Treasury have pumped out nearly $900 billion to bail out the bad bets of Wall Street. Now there’s movement for a “comprehensive” response, with taxpayers asked to take over the toxic paper of the banks, a bailout that may put over $1 trillion at risk. Conservatives are arguing that this crisis is due to government interference in the marketplace: that the Community Reinvestment Act forced banks to make bad loans; that Fannie Mae and Freddy Mac, in their quasi government status, were at the root of the crisis.
This is the big lie. The reality is simple and plain.
The Facts
Conservative economic philosophy has caused the current financial crisis. It is not “the market.” It is not miscalculation. It’s not even greed. Financial corporations are failing because conservatives created the conditions where greed would inevitably lead to economic chaos. [New York Times primer on the crisis]
Conservative “free market” fundamentalists dismantled New Deal protections. Finance is too important to be left to bankers. We learned that in the Great Depression. To curb irresponsible speculation and secure banks, Franklin Roosevelt and Congress reformed the financial industry with tighter controls on banks, mortgage lenders and other creditors, and stock exchanges. These reforms worked for more than fifty years. But starting in the 1980s, heeding Ronald Reagan’s call to shrink the federal government and leave the economy in the care of the market’s “invisible hand,” conservatives systematically dismantled economic safeguards. [Robert Kuttner’s American Prospect article and his congressional testimony]
Conservatives weakened and eventually repealed of the Glass-Steagall Act of 1933. Glass-Steagall separated investment banks and commercial banks, to prevent a single institution from making risky loans, repackaging them as securities, and selling them to investors—a major part of the current crisis. The Gramm-Leach-Bliley Act, which eliminated the Glass-Steagall limits, was authored by then-Senator Phil Gramm who is now John McCain’s chief financial advisor. [Newsweek]
Conservative regulators opposed using the powers that they had. The Federal Reserve, led by conservative Alan Greenspan, had the power and responsibility to police the mortgage market. A Democratic Congress gave him that job as part of the Homeownership Opportunity and Equity Protection Act of 1994. But based on the conservative anti-regulation philosophy, he never implemented the law. The Bush Administration subsequently encouraged Fannie Mae and Freddie Mac to increase sub-prime lending. [New York Times]
Conservatives cheered on the creation of a largely unregulated shadow banking system. Hedge funds and private-equity firms have been allowed to operate without limits, even though they create risky securities, buy and sell companies, and borrow at spectacular levels to speculate on the market. Bankers made millions by taking on ever more exotic risks. They turned home mortgages into speculative packages, and then pushed hard to lower standards of lending. Thanks to the conservative economic philosophy, these corporations have turned much of the market into nothing more than a gigantic gambling casino. [Paul Krugman]
Progressive Solutions
Impose new regulations on all parts of the financial system—limits on capital, leverage, exotic instruments, and compensation. The price of rescuing the financial system must be to get it back under control.
Strengthen the cop on the financial beat. We need regulators who will enforce the law, not scorn the responsibility they have.
Kick start the real economy, don’t just bail out the banks. We need a public investment initiative to get the economy moving, investing in renewable energy, rebuilding green, extending unemployment insurance, helping cities and states avoid deep cuts in health care, police and fire services, and more.
