In my last post, I promised to reveal what single action is the root cause for the failure of our economy. Oh, yes there were several dubious, politically motivated actions taken by members of congress that exacerbated the problem. My conservative friends have pointed rightly at the likes of Barney Frank for “encouraging” lenders to open up the mortgage markets to a wider consumer base than was appropriate. Other conservative buddies want to vilify all the damn people who bought a home bigger than they could afford. Because of lobbying and generous political contributions, so many of our sweet-electeds have made Fannie Mae and Freddie Mac so entirely corrupt those government sponsored forays into finance have sucked up so much tax dollars and will require so much more that we will probably never see a recovery of the dollars dumped there. For sure, there was some spurious lending and finance going on in the sub-prime loan departments also. But all of those egregious actions, even the insane tax cuts tossed out by George II, were a mere blip on the vast radar of economic misadventures compared to the repeal of the Glass Steagall Act. And whole bunches of politicians and lobbyist were guilty in that deed.
The Glass Steagall Act, GSA, (pardon me for I know I am boring those of you who know this topic well) was passed in 1933 during the administration of the most hated liberal of all, FDR. It was a direct action to make sure a market collapse that cased the Great Depression could not happen again. Simply, the GSA required that a commercial bank could not be an investment bank and vice versa. This bill for sixty years protected the American depositors from banks' fiddling around with depositors’ money in risky investments. What a great idea, right? Not if you are a conservative and want no government involvement because all conservatives know that banks and investment houses will regulate themselves out of the sheer goodness of their corporate hearts. Certainly not, if you are the honorable Phil Gramm who was the chief proponent of the repeal and if you will remember was the honorable John McCain’s financial adviser for a while. The first movements to repeal the GSA began in the Reagan years when the banks began to lobby hard. Of course, the swinish democrats jumped right in because they didn’t want to miss out on any of the huge political contributions all the banks and investment houses were passing out. The vote in the Senate went republican 52 for and 1 against while the democrats went for it 38 to 7. In the house the democrats were even more piggish and went along for the ride there: the donkeys voted 138 to 69 for the repeal and the overall vote being 343 to 86. You can do the math to see that the republicans, with their elephantine appetite for contributions and lobbying fun were not out done in their enthusiasm to let the banks have at the general population of the United States. Interestingly McCain and Nancy Pelosi saw the wisdom in not voting at all, proving they are more alike than not.
So what did the tax payer get for the repeal: a more conservative approach, a truly free market, a self-imposed moral order by big banking? What we got was Citigroup’s invention of the so called structured investment vehicles. Now think about that: structured investment vehicle, not a stock, an ownership in a good American company, not a commodity like oil, grain, sow bellies but mortgage-backed securities and collateralized debt obligations. Now I want to tell you if you do not already know: nobody but nobody knows what they hell those things are. They are so complicated, contrived, and convoluted that the banks and insurance companies, who joined in the fun by filling their portfolios with the rascally investments, had to pay performance-bonuses to the few ladies and gentleman on Wall Street who had twisted all these “investments” together into the world’s largest Pretzel Hold. The bonuses were supposed to be for their sticking around to explain what they had wrought; they never did so that anyone could understand how to get out of the Hold. They got the money, but guess what? What any of these investments are worth remains one of earth's great mysteries. Heck in many cases banks don’t even know who owns the mortgage on a home so that somebody can kick the guy out that is not making the payments. What they do know, but ain’t telling you and me, is that the vehicles are clunkers and are pretty much worthless. The bonus-babies also are pretty sure that the MBSs and CDOs are so entwined by compounded sales that they can’t be pulled apart and are The Financial Tar Pit. Problem is that the bones in the Tar Pit will not be from the bad boys and girls who designed this nefarious activity and spurious vehicles but will be the bones of the taxpayers, awash in all kinds of debt.
So why am I picking on the conservatives? Because they are preventing a reckoning, a righteous come-to-Jesus-good-ol-fashioned-ass-whuppin’ by refusing to see their noses for their asses, that’s why. As long as they keep screaming, “No more government, get the government out of our lives,” we will never get this derelict on the right keel because it is the government that has to go in and clean house. It would be real easy to reenact the Glass Steagall, it worked for 60 years. It would be real easy to make lobbying illegal because it is corrupting at all levels (freedom of speech does not allow for fraud or extortion). And it would be real easy to assemble a nonpartisan panel of folks to investigate the financial crimes against America and get some old fashioned accountability and punishment going for the crooked politicians, the crooked bankers, the crooked bureaucrats who led us to this mess and who are going to come away unscathed. That would make a whole bunch of us happy. But the conservatives, ironically, won’t let conservative stuff happen.
And that is a conundrum in a paradox.