Financial Crisis: What Democrats Fail to Mention

Democrats find it easier to blame the Bush administration or Reaganomics than to admit the role of the Democratic Party in the current financial crisis.  However, the repeal of the Glass-Steagall Act of 1933 during Bill Clinton's term of office is a major contributing factor to the financial crisis Americans are experiencing.

The first Glass-Steagall Act was passed in 1932 in an effort to stop deflation.  Due to the collapse of a large number of American commercial banks in early 1933, the Glass-Steagall Act of 1933 was enacted.  This Act established barriers between the banking and security industries to protect investors from the hazards of speculation and risky investments. 

During the late 1990s, the Clinton administration, Congress, the Federal Reserve, big banks, security firms, and insurers worked together to dismantle the Glass-Steagall Act.

Democratic liberals such as Dodd, Kennedy, Kerry, Reid, and Schumer went along with other Senate Democrats (Biden included) for a total of 38 out of 45 Senate Democrats voting to repeal Glass-Steagall.  The final vote was 90-8.  The House Democrats were equally to blame by voting 138 for and 69 against, a 2:1 ratio.  Final vote total:  343-86.

As a result, on November 12, 1999, Bill Clinton repealed Glass-Steagall by signing into law the Gramm-Leach-Bliley Act.

Economists have criticized the repeal of the Glass-Steagall Act of 1933 as contributing to the 2007 subprime mortgage financial crisis. 

The repeal enabled commercial lenders such as Citigroup, which was in 1999 then the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.  It is therefore seen by some that the repeal of this act contributed to the global financial crisis of 2008-2009.  The year before the repeal, subprime loans were just 5% of all mortgage lending.  By the time the credit crisis peaked in 2008, they were approaching 30%. -- Wikipedia 

Lobbyists for the finance, insurance, and real estate industries (known as the FIRE sector) spent over $200 million on lobbying and made more than $150 million in political donations to ensure passage of the Gramm-Leach-Bliley Act.  Members of congressional banking committees or committees with jurisdiction over financial services legislation were the primary beneficiaries.  

The influence of the FIRE sector on American politics can be shown by the statistics compiled for the 2008 presidential election.  The information below is provided by OpenSecrets.org, Center for Responsive Politics, and reveals the contributions to the Obama campaign under the category of "Industry."  The FIRE sector contributions amount to $38,089,102 or just over 46% of all money raised from the industry sector as a whole. 

It is also interesting that, as of March 2008, Obama had taken more money from the top 10 subprime issuers than had been the case in any other presidential campaign.  Obama's contributions from the subprime lending industry, again as of March 2008, totaled $1.8 million.  An article by Gerald McEntee in the Huffington Post, "Obama and His Subprime Supporters---Are His Words for Real?" (3/27/08) raised doubt about Obama's campaign promises to reform the subprime lending industry. 

There's an important reason to doubt the Obama campaign's public expressions of support for reform of the subprime lending industry: Contributors from the industry have provided more than a million dollars to Senator Obama's campaign. In fact, Senator Obama has taken $1.8 million from the folks who have pushed these loans on unsuspecting working families. He's taken more money from the top ten subprime issuers -- more than $400,000 -- than any other presidential campaign. Even today, following his economic speech in New York, the senator scheduled a fundraiser at Credit Suisse, one of the top subprime underwriters in the country.

Does Professor Goolsbee's* get tough approach on subprime lenders really reflect Senator Obama's plans? Or do the lenders who have given so much to Senator Obama's campaign know something different? Is the Obama campaign once again talking tough in public while sending private messages behind the scenes?

Senator Obama should answer this simple question: Is he planning on following the public advice of Professor Goolsbee on the subprime crisis, or is he working behind the scenes to keep his fat cat contributors happy?

Tough questions but they give us some insight as to why Wall Street, big banks, and AIG are getting the government bailouts, CEOs are getting their fat bonuses, and Main Street is feeling the pain. 

*Austan Dean Goolsbee is on leave from the University of Chicago Graduate School of Business where he a professor of economics.  He is currently serving under President Barack Obama as a member of the Council of Economic Advisers and as staff director and chief economist of a new federal panel, the President's Economic Recovery Advisory Board chaired by Paul Volcker.  Goolsbee's "get tough" position on subprime lenders is a reversal of his long-held position.  In an article by Goolsbee in the New York Times (3/29/07), he warns regulators to "be mindful of the potential downside in tightening too much" as it may impact African-American and Hispanic homeowners who have benefited from these subprime loans.  He closes by saying, "For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage."

Resource Material:

William Kaufman: Shattering the Glass-Steagall Act 

http://www.counterpunch.org/kaufman09192008.html

Top Industries, Barack Obama | OpenSecrets 

http://www.opensecrets.org/pres08/indus.php?cycle=2008&cid=N00009638

Glass-Steagall Act - Wikipedia, the free encyclopedia 

http://en.wikipedia.org/wiki/Glass-Steagall_Act

Gerald McEntee: Obama and His Subprime Supporters -- Are His Words For Real? 

http://www.huffingtonpost.com/gerald-mcentee/obama-and-his-subprime-su_b_93778.html?show_comment_id=12181585

Frontline: the wall street fix: mr. weill goes to washington: the long demise of glass-steagall | PBS http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

Economic Scene - 'Irresponsible' Mortgages Have Opened Doors to Many of the Excluded - NYTimes.com by Austan Goolsbee