The current financial crisis is indeed grave, having resulted in the nation's largest bank failure (Washington Mutual) and taken down the nation's largest insurance company (AIG) and mortgage holders (Fannie Mae and Freddie Mac) as well as three of the top investment houses (Bear Stearns, Lehman Bros., and Merrill Lynch) and threatening countless more failures both here and abroad -- in particular, there are hundreds of trillions of dollars tied up in bad securities in the interconnected international finance system; and most disturbingly, no one knows how much they are really worth, since no one wants to buy them. The credit system has frozen up; and without free-flowing credit, businesses go out of business.
Because this crisis is threatening the existence of banks and businesses it is threatening the life savings and jobs of millions of people in the United States and abroad. It is not an exaggeration for this to be called by so many the gravest financial crisis since the Great Depression.
And the causes of the current problem are much the same as those of the Great Depression. As my late father had been saying since the Reagan administration, as more and more of the New Deal safeguards set up under FDR and the Democratic Congress in the '30s were being torn down, we ran more and more risk of having a big financial collapse, as he lived through, in desperate conditions, during the Depression. So it's worth our while to look back briefly and see what worked and what went terribly wrong.
In the Roaring Twenties, the Republicans, under Presidents Harding, Coolidge, and Hoover, deregulated business. Although the economy did roar for a while, it eventually went bust, as the stock market crashed and banks and businesses failed, wiping out life savings and throwing millions of people out of work. Republican fixes did little if anything to help. The people demanded new leadership.
FDR and the Democrats in Congress instituted reforms with the New Deal, including regulations that saved the American banking system and, thus, American capitalism. Key among these regulations was the Glass-Steagall Act (which we're hearing a lot of these days) ...
... which established the Federal Deposit Insurance Corporation (The FDIC, which so many of us rely upon to safeguard our money) and also provisions that gave the Federal Reserve oversight authority over savings accounts and also a prohibition over bank holding companies owning other financial institutions (so too many eggs wouldn't be in too few baskets, many of which had just gone bust).
The New Deal reforms became an accepted part of American financial life for decades. In the post-War years, for the first time in history -- which had had many depressions, although none so "great" as that in the '30s -- Americans came to think of money in the bank as safe and secure as "money in the bank."
Perhaps we grew complacent or just wanted to take more risk or were just hoodwinked, but big money interests -- who never wanted so much government control over their business -- eventually convinced voters and their elected representatives that the New Deal regulations were just too restrictive. Starting in the 1980s, the New Deal regulations over the financial industry were dismantled ... ultimately with disastrous consequences.
In 1980 the Depository Institutions Deregulation and Monetary Control Act was enacted, loosening up some federal controls over savings and loans.
In 1982 the Garn-St. Germain Depository Institutions Act was enacted, deregulating the Savings and Loan industry ...
By the late 1980s, ravaged by excesses and greed -- sometimes criminally fraudulent (as with the Keating Five scandal, involving five senators, including Sen. John McCain) but often just the consequence of inadequate regulation -- the Savings and Loan industry crashed, bringing on the recession that would hurt millions of Americans and put the first Pres. Bush out of office. If the S&L industry were to have collapsed further it would have done even worse damage to the economy as a whole, so the taxpayers bailed out the S&Ls, at a cost of over $100 billion.
But somehow deregulation continued to be a popular theme. The mantra was still as Reagan had proclaimed in his first inaugural address: "The government is not the solution to our problem; government is the problem."
Replacing Geo. H. W. Bush was Bill Clinton, who "felt our pain" but -- as a "New Democrat," a "centrist" -- continued to advance the cause of deregulation; and in that, he found plenty of allies in both parties. The huge campaign contributions that the financial industry lavished upon politicians in both political parties undoubtedly had much to do with bipartisan support for deregulation; but also, increasing prosperity -- as the business cycle turned and tax dollars were redistributed by the Democratic president and Congress from the wealthy into the hands of the growing middle class -- convinced all-too-many Americans to "drink the Kool Aid" of deregulation.
And like the deregulation of the electricity market here in California, which had bipartisan support, other deregulation schemes from that era would blow up in everyone's faces and cost hundreds of billions of dollars (and counting).
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