Summers and Robert Rubin who both served as Clinton’s Treasury secretaries lobbied hard Clinton and Congress in the late 1990s to dump most of the provisions of the decades old Glass-Steagall Act. The Act was the 1930’s Great Depression era measure that kept federally insured banks out of the go-go world of stock trading, exotic lending and financial speculation. It also set rigid standards for mortgage lending and strict oversight over banking practices.
The rationale for scrapping the Act was that U.S. banks and brokerage houses needed to have the restrictions snatched off to stay competitive with Asian and European bankers and financial traders. President Clinton bought the line. The revision bill passed with bipartisan support in 1999 and Clinton quickly signed it.
But that was only part of the financial deal cutting between the banks and Clinton and Congress. A year later Summers in tandem with then Texas GOP senator and Chair of the Senate Banking Committee Phil Gramm rammed through another “financial modernization” measure. This one took the wraps off government regulations that checked banks, insurance companies and brokerage houses from dumping billions into financial swaps (speculation) on commodities such as oil and food staples. The rationale was the same as that given for getting rid of Glass-Steagall and that was to keep the financial institutions as full profit centers with minimal to no government oversight accountability or investor, depositor and shareholder accountabilityThe predictable quickly happened with the regulatory gloves off commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could do whatever they wanted when it came to investing in each others businesses and marching in lock step with each other’s financial operations. A buoyant Summers called the revamp of the financial industry as "the legislative foundation of the financial system of the 21st century". The question that hangs precariously in the air is does Summers still think that the implosion of Wall Street which directly resulted from the terrible policies that he and other Clinton financial gurus orchestrated a decade ago and that has led to so much waste, misery and bickering is a fit model for righting the economic ship today? Democratic House Speaker Nancy Pelosi evidently thinks so. She raised a red flag when she couldn’t say enough good things about Summers and other former Clinton officials and the cast of Wall Street connected advisors that Team Obama’s has put on public display. Another red flag is that Obama’s key economic players still may not have learned the right lessons from the havoc to the financial markets and damage to consumers the rush to give Wall Street a free rein created is Bill Clinton’s reaction to the chaos. He has publicly said that he has no regrets over signing the deregulatory bill.
Still another red flag is the action of Senate Democrats. They helped to kill a bill in 2005 that would have re-imposed some constraints on the financial industry. The reason was the same as before; any limitation would stifle its ability to compete. The final red flag that Obama’s economic players may not be the right antidote for the crisis came from Obama. At his press conference unveiling the players, he assured that his team offered "sound judgment and fresh thinking" to deal with the dire economic peril. Time will tell on that one. But if the past is any predictor of things that can go wrong again, the red flags on Obama’s economic team should fly high. Earl Ofari Hutchinson is an author and political analyst. His forthcoming book is How Obama Won (Middle Passage Press January 2009)