OpEdNews » Death and Dying on Wall Street:: The End of the Reagan Era

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Tag(s): Bailout; Banking; Banks; Congress; Congress; Default; Events; Foreclosures; Government; Markets; (more...) Money; Money; Money; Privatization; Security; Speculation; Wall Street; Wall Street Journal; Wallace-Henry; Wally Hickel (less...)
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September 18, 2008 at 06:22:04

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Death and Dying on Wall Street:: The End of the Reagan Era

by David Schultz Page 1 of 1 page(s)

www.opednews.com

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The loud thuds heard across America this week were not just the sounds of Merrill Lynch and Lehman Brothers collapsing. It was also the crash of two conservative ideas–deregulation of the American economy and the privatization of Social security. Wall Street’s collapse thus portends both a requiem on a bankrupt political economic philosophy and new path for America. As such, the United States of 2008 is poised almost exactly where it was in 1933.

As Franklin Roosevelt assumed the presidency in 1933 America’s financial and banking system had collapsed. Broke due to stock speculation, the crash of 1929, and then a run on deposits, many bankers and members of Congress saw two options, nationalize the financial institutions or fix them up. FDR chose the latter. Among the key provisions to rescuing the banking system was the 1933 Glass-Steagall Act. The Act contained many well-known provisions, including the creation of the Federal Deposit Insurance Corporation to insure depositors’ money.

But Glass-Steagall also created two classes of banks–commercial and investment. The former would be barred from engaging in stock speculation and instead would be limited to making money generally through home and other types of loans. Investment banks would be permitted to speculate on Wall Street. Glass-Steagall was considered a major banking reform; it erected a firewall to prevent the type of speculation that occurred in the 1920s from repeating itself, thereby protecting financial institutions and the public from the problems that destroyed them with the crash of 1929.

For 66 years Glass-Steagall worked. It brought stability to banking institutions by securing deposits, limiting speculation, and encouraging home ownership. Commercial banks did well, earning solid and consistent returns for years. Glass-Steagall, along with many other pieces of New Deal legislation, such as Social Security, brought government regulation to the economy, producing a stable correction to the failures of free market laissez faire capitalism.

But the Reagan era challenged regulatory capitalism. Describing government not as the solution but the problem, it ushered in an almost cult-like belief in the infinite wisdom of the market to solve all problems. If individuals, guided by self-interest were free to choose, the market could replace the government, solve problems anywhere from pollution to school quality, and also make us rich. Thus, the Reagan era began the push to deregulate the economy from government controls, and it also spurred calls for other changes, such as the privatization of Social Security.

When the stock markets exploded during the 1990s, many market worshipers came to see Glass-Steagall as a quaint holdover from the New Deal era. Thus in 1999, senator Phil Gramm–and up until recently presidential candidate John McCain’s financial advisor–pushed through the repeal of Glass-Steagall, permitting yet again a merger of commercial and investment banking institutions. Now banks, eager to raise money to invest on Wall Street, had little incentive to deny loans to individuals. These loans would help provide the capital to invest in securities.

Yet when the real estate market busted and the defaults started, these events began a chain of events that first brought down Freddy Mac, Fannie Mae, Bear Stearns, and now Merrill Lynch and Lehman Brothers. Had Glass-Steagall still been in place the firewalls it had would have prevented the type of speculation and damage that is now occurring. Moreover, had the free marketers gotten their way with the privatization of Social Security and allowing individuals to invest this money on Wall Street, the damage of the last few days would have been even worse.

The events of the last few weeks demonstrate the limits of deregulation and an infinite faith in markets. They should be stakes in the heart of the Reagan era philosophy that government is bad. The events of the last few days have also brought us back to the 1930s, with a financial system similarly in shambles. What should be done?

Unfortunately the Bush Administration bailouts and rescues are the wrong courses of actions. They reward banks for making bad choices and leave untouched three basic problems, falling home equity, foreclosures, and the speculation brought on by the merger of commercial and financial banks. Bailouts are but band-aids and do little to address these basic problems. Where should reform go?

First, reinstate the firewalls of Glass-Steagall to restore stability to the financial institutions and eliminate the type of speculation that brought on the current mess. Second, institute a moratorium on home foreclosures for a least one if not two years. This moratorium keeps people in their homes and prevents a further glut of houses from hitting the market, thereby preventing a further skid in home prices.

But finally, instead of taking the path that FDR did in 1933 in refusing to nationalize the banks, take them over as the Bush Administration is doing, but maintain them as government institutions run not for profit but for the public interest. The surest way to prevent future irrational speculation is to place the banks under public control. Use the profits they generate to ensure Social Security’s solvency, keep people in their homes, provide health care for the uninsured, build and repair the roads and bridges we have neglected, and make the investments in the economy we need but have failed to provide.

http://davidschultz.efoliomn2.com/

David Schultz is Hamline University professor in the Graduate School of Management where he teaches classes in government ethics, public policy, and public administration. He also holds appointments in the Hamline University Department of Criminal Justice and Forensic Science, where he teaches classes on crime, criminal procedure, and policing, and at the Minnesota Law School where he teaches election law, professional responsibility, and state constitutional law. David is also a senior fellow at the Institute of Law and Politics at the University of Minnesota Law School. Professor Schultz is the author of 24 books, 12 legal treatises on eminent domain, and over fifty articles on various aspects of law, ethics, public policy, and the media and politics. His most recent publications include: Encyclopedia of Civil Liberties in America (M.E. Sharpe), the Encyclopedia of the Supreme Court (Facts on File, Inc), and Lights, Camera, Campaign Media, Politics, and Political Advertising (Peter Lang Publishing). He is currently working on his forthcoming Encyclopedia of the United States Constitution (Facts on File, Inc.) and the Encyclopedia of the First Amendment (Congressional Quarterly Press). David is admitted to practice before the Minnesota state and federal district court bars and before the United States Supreme Court where he has participated in several briefs.

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3 comments

Bia Winter is an Artist/Writer from Maine, and has been an activist and letter-writer since the 60's. In 2004 she received the Roger Baldwin Award from the Maine American Civil Liberties Union for furthering Democracy after she got a Resolution Against the USA"Patriot"Act passed in her small home town of Mount Vernon, by overwhelming show-of-hands vote at Town Meeting. She continues to Write, Activate and Cartoon for Progressive causes. Her Letters are often seen in the Baltimore Chronicle, as w...

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Bia WinterBia Winter is an Artist/Writer from Maine, and has been an activist and letter-writer since the 60's. In 2004 she received the Roger Baldwin Award from the Maine American Civil Liberties Union for furthering Democracy after she got a Resolution Against the USA"Patriot"Act passed in her small home town of Mount Vernon, by overwhelming show-of-hands vote at Town Meeting. She continues to Write, Activate and Cartoon for Progressive causes. Her Letters are often seen in the Baltimore Chronicle, as w...

to see more of bio, click on member name

What's that trickling down your leg?

Huh, you old die-hard Reaganites;

Is that your Retirement Fund?

by Bia Winter (4 articles, 0 quicklinks, 11 diaries, 457 comments) on Friday, September 19, 2008 at 9:47:57 AM

MBA International corporate real estate executive and broker, tri-lingual English, Spanish, Portuguese, resided in Brazil, Mexico, Chile, Peru, and Argentina.
Robert MacNicolMBA International corporate real estate executive and broker, tri-lingual English, Spanish, Portuguese, resided in Brazil, Mexico, Chile, Peru, and Argentina.

Reagan de-Regulation and Bush1 & 2 Wars Forever Fascism

Republicans John McCain and Sarah Palin may be the most dangerous political candidates in the history of the U.S. They are the representatives of the Bush-Cheney-Neocon-Israeli favored -Cabal that seems to view World War III as not only the favored method to avoid facing our economic plight but also something really exciting and justifiable in its own right. McCain fits in perfectly with that view-the only thing that really seems to turn him on is the prospect of more war.

McCain admits he knows little about economics, yet he has endorsed George W. Bush's plan to privatize Social Security. This plan would result in large fees and commissions for the financial industry while reducing benefits for most workers. (Dean Baker, "McCain Would Privatize Social Security," Truthout Perspective, September 15, 2008) McCain has also declared the present U.S. economy "fundamentally sound."

"Caribou Barbie" Palin serves as a comely cheerleader to get Christian fundamentalism behind the ticket. She is a member of an aggressive right-wing Christian cult known as "Joel's Army," an offshoot of Dominionism, which says that in the "end times" they will "rise up and battle evil and retake the earth for God." (Bruce Wilson, Sarah Palin's Churches and the New Wave Apostolic Reformation, www.endtimespropheticwords.wordpress.com.)

The Religious Right gives the impression of frightened and ignorant people whose angst is being diverted toward political extremism by unscrupulous preachers who are being paid off by the financier-corporate elite so their flocks will not take a hard look at the financial system which is driving them toward poverty. German psychoanalyst Wilhelm Reich captured some of the flavor of this phenomenon during Hitler's rise to power in his famous book, The Mass Psychology of Fascism.

Palin has spoken casually of war with Russia as a real possibility. The Republican party platform is heavily oriented toward preemptive and aggressive war. The fact that a huge segment of the U.S. economy makes its living off military spending obviously predisposes a large number of voters to select the candidates who seem to provide them with job security.

There are people in my family who work for military contractors and believe that only under a Republican regime will they have jobs. Also supporting McCain/Palin are the beneficiaries of "Big Oil," since they would gain substantial tax breaks under McCain's proposals.

In a column titled "Blizzard of Lies," New York Times columnist Paul Krugman writes that the Republicans are running the most blatantly dishonest campaign in history: "What it says, I'd argue, is that the Obama campaign is wrong to suggest that a McCain-Palin administration would just be a continuation of Bush-Cheney. If the way John McCain and Sarah Palin are campaigning is any indication, it would be much, much worse."

by Robert MacNicol (0 articles, 0 quicklinks, 0 diaries, 2 comments) on Friday, September 19, 2008 at 1:18:19 PM

I am just concerned single father of 2 trying to make sense of this crazy world. I am college educated. I have Degrees in Business Administration and Accounting. I try to bring an average middle class point of view to my articles about what is going on in this country and around the world in hopes it will help other folks like me look at things beyond the sound bytes and distortions of the MSM. Residing in beautiful upstate NY.
Dan KochI am just concerned single father of 2 trying to make sense of this crazy world. I am college educated. I have Degrees in Business Administration and Accounting. I try to bring an average middle class point of view to my articles about what is going on in this country and around the world in hopes it will help other folks like me look at things beyond the sound bytes and distortions of the MSM. Residing in beautiful upstate NY.

I'm sorry. but these ideas are the path to communism.

I'm sorry Prof. Schultz. With all due respect, those suggestions are the exact opposite of the principles that founded this country. In Marxist theory, the stage following capitalism in the transition of a society to communism, is characterized by the imperfect implementation of collectivist principles.

It seems in order to regain stability, I feel we should remove the Fed. The existence of the Fed itself causes these wild market swings with their constant influxes of "cash." Would you agree? Let's face it, there's nothing federal about the Fed. It is an unconstitutional authority. The Constitution states Congress [emphasis added] shall coin money and "make any Thing but gold and silver Coin a Tender in Payment of Debts". No where does it state that congress can outsource that job to a private entity such as the Fed. Fractional reserve restrictions have long been abandoned. What used to be 2:1 went to 9:1 and now is 20:1 or 30:1 some cases. And since there is no oversight, these numbers are arbitrary. The are free to create all that is necessary.

I have not researched the debate that gold and silver can meet today's financial requirements. Everything has ballooned far past the value of U.S. Gold Reserves. (unless gold shoots back up to $1000/oz again! lol). Why is it that when markets become unstable, investors always shift their money to gold? Because gold is always considered a safe value. In fact, gold's basic intrinsic value still hasn't change much over centuries.

Fiat currency theory has never worked. Giving the Fed power to create money out of nothing only serves only to debase the value of the currency. People don't comprehend all these trillions of dollars. Where does all this money come from? It's not printed at the mint I can tell you that. No its created at the fingertips of a few select people. A couple keystrokes in a computer and POOF! money is created. Nice work if you can get it.

I feel we must get our brightest minds together and work out a value base money system. Texas congressman Ron Paul (R) has proposed this for years, and I agree. Thank you for your time.

by Dan Koch (3 articles, 0 quicklinks, 1 diaries, 27 comments) on Saturday, September 20, 2008 at 6:54:54 AM