What follows is a synthesis, summary and abridgement of recent discussions with veteran journalist and Truthdig.com editor Robert
Scheer about his new book, The Great
American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging
Try as he might, President Reagan was unable to reverse the very sensible regulations of the New Deal that were designed to prevent us from getting into another depression. Those regulations, principally Glass-Steagall , stated that investment banks gambling with rich people's money should not be allowed to merge with commercial banks that were using regular bank deposits insured (FDIC) by our government. Because of the savings and loan scandal at the end of his term, Reagan actually had to sign off on increased financial regulation. But when Clinton took over at the White House, he brought in one of the big players on Wall Street, Robert Rubin, former head of Goldman Sachs, and asked Rubin this question: "What do I need to do to get Wall Street on my side?" Rubin's reply was simple: "Reverse onerous financial regulation." And Clinton complied. Then he selected Rubin as his Treasury secretary, and Rubin was followed by another Wall Street toady, Lawrence Summers, who's now the top economics adviser (guardian-protector of Wall Street interests) in the Obama White House.
In addition to approving the Gramm bill that reversed
laid still more of the groundwork for our current crisis. After Summers had pushed it through, and Congress
approved, the Commodity Futures
Modernization Act of 2000, Clinton
signed off on it as well. And this lies
at the very root of our recent housing meltdown.
You see, we had these things called
derivatives that a few sensible people in the administration, like Brooksley Born, had tried to warn everyone about. However,
few people besides her seemed to know what these often dangerous investments were
all about. And those who did know would
not allow themselves to think about anything other than the enormous amounts of
money that could be made from them. The bundling
of mortgages, packaged together and made into securities to sell far and wide, targeting
naïve and trusting investors who foolishly thought that their triple-A ratings
meant something, comprises a large part of what encouraged all of the wild
subprime and Alt-A financing. Mortgage
brokers couldn't find people fast enough to set up with mortgages. No job, no problem. Mortgage applications became increasingly
fraudulent. But who cared? -- these
mortgages would be packaged together with hundreds of others so that even if
one or two went bad, the security package as a whole would still be worth
Besides, once the sliced and diced investment units (individual securities) were sold to a wide variety of unsuspecting buyers around the world (as deregulation now allowed), it would no longer be the problem of the person or institution that put the package together. Then too, these packaged securities were being backed by credit default swaps -- a kind of insurance issued by companies like AIG, who made plenty of money off of the premiums that were paid to them, but who ultimately had nowhere near enough capital on hand to pay off the claims when the housing market collapsed, thus requiring the taxpayers to bail them out.
Bottom line: these gimmicky investment vehicles that eventually spiraled out of control were made possible because of the aforementioned Commodity Futures Modernization Act, which Clinton signed and which clearly stated that no existing government regulation and no existing government regulatory body would be allowed to supervise them or regulate them. Especially not to be permitted was any regulation of the the credit default swaps and collateralized debt obligations that Brooksley Born had warned everyone in the Clinton administration about, (to no avail, her pleas falling on deaf ears).
As a result of no one listening to Born, we had this wild run-up of irresponsible mortgage lending. The banks no longer, as in the old days, worried about whether the borrower could make his payments or whether there was sufficient value in the house. Why not? Because they weren't going to hold that mortgage for thirty years like in the old days. To repeat, and thus stress this key point: They were going to bundle it with hundreds of other mortgages, securitize it, and sell it, ASAP, just like they were now allowed to do, thanks to Clinton signing off on the Commodity Futures Modernization Act. That's why the wild run-up of the market should be known as the Clinton bubble.
And now, as a result, we're threatened with the very real possibility of another steep socioeconomic decline, perhaps even a decade of Japanese-style stagnation. And the reason is because we taxpayers (via our underwater mortgages and via the toxic debt purchased from the big banks by the Fed) are holding trillions of dollars of these toxic investments. As a result, housing right now is in a terrible state of affairs. There are 11 million homeowners that are underwater (mortgage debt exceeds the price for which the house can be sold). That means 50 million people living in houses that are now worth less than what is owed on them. Not surprisingly these people are increasingly tempted to simply walk away from these houses, and many are doing so (especially the well-heeled), thereby leaving ever more banks with the loss of the money that is owed to them via the abandoned mortgages. And then the Fed buys this toxic debt from these banks, to help them out, and this indebtedness ultimately lands back in the lap of the American taxpayer. Sweet!