The Strange Death of Liberal America

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In the past few weeks I have been in essence accused of aiding and abetting the enemy by several so-called Democratic/liberal bloggers because I dared utter the unspeakable truth that elements of the Democratic Party have a responsibility for the current financial crisis just as they also have a responsibility for the Iraq War, the Bush tax cuts, the Patriot Act, Guantanamo and the whole sorry mess of the last few decades.

So let me lay my cards on the table at the beginning. Number one, along with a growing number of economists and financial analysts I believe that the roots of the current crisis lie in the repeal of one of the crown jewels of the New Deal, the Glass-Steagall Act. I wrote the first post on this several years ago and have followed up with several more, the last of which was a series this past spring. These posts have been plagiarized and appropriated by bloggers so fast I cannot keep up with them.  Number two, on the Democratic side at the head of the list of those who shoulder this burden is one William Jefferson Clinton and the so-called Democratic Leadership Council.  Number three, the chief author of the bill repealing Glass-Steagall was none other than one Phil Gramm, who is the co-chair of the campaign of one John McCain. Number four, Barack Obama and the Democratic Party as a Party had nothing to do with the repeal of Glass-Steagall.

The Counterrevolution

So let’s start with the big picture, which begins with the Republican Counterrevolution. As I have written in my book, The Strange Death of Liberal America, the Counterrevolution has been dedicated to rolling back the philosophy and programs of the New Deal.  Chief Republican strategist Karl Rove has spoken of his admiration for the administration of William McKinley and his desire to take America back to those times. The popular mind associates the Counterrevolution with the famous phrase from Ronald Reagan’s First Inaugural:

Government is not the solution to our problem;government is the problem.

But in fact the Counterrevolution has been about more than merely cutting back government or lowering taxes. It has been about returning to a philosophy that was best expressed by McKinley’s contemporary, Yale professor William Graham Sumner, who thought charity of any kind–let alone government aid–was wrong:

The next time that you are tempted to subscribe a dollar to a charity, I do not tell you not to do it, because after you have fairly considered the matter, you may think it right to do it, but I do ask you to stop and remember the Forgotten Man and understand that if you put your dollar in the savings bank it will go to swell the capital of the country which is available for division amongst those who, while they earn it, will reproduce it with increase.

Back in the days of William McKinley there were also some Democrats who thought that government had no business aiding the poor, the down-on-their-luck, the disabled. They were known as Bourbons and their leader was Grover Cleveland.

Perhaps one of Cleveland’s most revealing moments came when he vetoed an 1887 bill that would have provided free seed to drought-stricken farmers. In his message Cleveland wrote:

The lesson should constantly be enforced that though the people support the government, the government should not support the people. ..Federal aid, in such cases, encourages the expectations of paternal care on the part of the government and weakens the sturdiness of our national character. (Quoted in Richard Welch, The Presidencies of Grover Cleveland, p. 14)

The Core Belief of Liberal America and Glass-Steagall

William Jennings Bryan, Woodrow Wilson and Franklin Roosevelt along with several generations of grassroots progressives did not believe in this philosophy. As I stated in The Strange Death of Liberal America they believed that at the heart of the liberal–and American ideal–lay the belief that government exists to keep the playing field level. This philosophy lay behind to the creation of the Federal Reserve System under Wilson and to the various programs of the New Deal under FDR.

One of the crown jewels of those programs was the Glass-Steagall Act. Carter Glass, an old foe of banks entering into the stock market, insured that the Banking Act of 1933 contained four key provisions:

• Section 16 – restricted commercial national banks from engaging in most investment banking;
• Section 20 – prohibited any member bank from affiliating in specific ways with an investment bank;
• Section 21 – restricted investment banks from engaging in any commercial banking; and
• Section 32 – prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.

With these four provisions, Glass had the preventative measures he felt would avert another financial crisis. Added to these was Steagall’s contribution: the creation of the Federal Deposit Insurance Corporation.

Attempts to Scuttle Glass-Steagall

In the years after the passage of Glass-Steagall the financial industry and its allies in the Republican Party worked to repeal the Act.

The most notable moment in the attempts to scuttle Glass-Steagall came with the 1971 Supreme Court decision Investment Company Institute v. Camp. In that complex case the Court issued one of the most ringing and unequivocal defenses of Glass-Steagall:

Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.

The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.

Many arguments the Supreme Court advanced in support of Glass-Steagall, would prove prophetic three decades later.

The Creation of the Democratic Leadership Council

As the Republican Party continued to work to change Glass-Steagall, the Democratic Party also underwent some internal changes, especially after the stunning defeat of Walter Mondale in 1984. To some Democrats Mondale’s defeat also represented a defeat for the principles of the New Deal and Liberal America that had guided the Party for most of the twentieth century. To these Democrats those policies were obsolete in the face of the Republican rise under Ronald Reagan.

Together these disgruntled Democrats formed the Democratic Leadership Council. At first mainly composed of Southerners who were determined to put a Southerner on the ticket in 1988, they came to embrace a larger national following.

By 1990 Bill Clinton had became chair of the DLC. His first act was to preside over the formulation of the 1990 New Orleans Declaration. This document would become the blueprint for Clinton’s future and that of the Democratic Party. The most telling of these principles are:

We believe the Democratic Party’s fundamental mission is to expand opportunity, not government.

We believe that economic growth is the prerequisite to expanding opportunity for everyone. The free market, regulated in the public interest, is the best engine of general prosperity.

In a speech that would salute Bill Clinton and relate the history of the DLC, DLC CEO Al From described the principles of the DLC:

As the 1960s passed into the 1970s, the liberal agenda — largely because of its success — ran out of steam, and the intellectual coherence of the New Deal began to dissipate. The Democratic coalition split apart over civil rights, Vietnam, economic change, and culture and values, and the great cause of liberal government that had animated the Democratic Party for three decades degenerated into a collection of special pleaders…Democrats had run out of ideas — and liberalism was in great need of resuscitation.

Bill Clinton’s Second Inaugural

In his Second Inaugural, Bill Clinton pulled a Grover Cleveland, essentially adopting the pro-business, free-market philosophy of the GOP. In doing so he gutted the belief that government exists to keep the playing field level, a belief that guided the Democratic Party for most of the American Century.

The tenth paragraph of Clinton’s Second Inaugural makes this clear.

As times change, so government must change. We need a new government for a new century, humble enough not to try to solve all our problems for us, but strong enough to give us the tools to solve our problems for ourselves; a government that is smaller, lives within its means, and does more with less.

Having capitulated to the Republicans, Clinton embraces a concept that, like much with Bill Clinton, sounds good, but lacks any depth.

Each and every one of us, in our own way, must assume personal responsibility, not only for ourselves and our families, but for our neighbors and our nation

That every American should accept responsibility is difficult to argue with, until you realize that from a rhetorical perspective Clinton has just shifted the pea from under one shell to another right before our eyes. Remember that several paragraphs before Clinton had spoken about the role of government and now suddenly we find government has vanished and we have entered that realm of individual responsibility that has served as Republican dogma since the Gilded Age of the nineteenth century.

Leadership and Presidential scholar James MacGregor Burns’ final judgment of Bill Clinton captures the essence of the Clinton Presidency:

The health bill defeat strengthened the hand of those in the administration who wanted the president to follow a political strategy of centrism, moderation, and bipartisanship, operating in the middle of the political and ideological spectrum. Urging transactional rather than transformational leadership, they would have the White House negotiate with friends and foes, left and right, on an ad hoc step-by-step basis.

This was the incrementalism of “policy bites,” such as favoring school uniforms or advising mothers how to put their children in seat belts.

The Repeal of Glass-Steagall

I provide this background on Clinton to show that even before the repeal of Glass-Steagall, the philosophical foundations were already in place to make the repeal possible.  On top of this in the background of the go-go economy of the 1990s, the feeling grew among some economists and the financial community that Glass-Steagall hampered America’s financial competitiveness. Among the many voices favoring this was Alan Greenspan along with former Goldman Sachs partner Robert Rubin, Bill Clinton’s Treasury Secretary. In a 1995 speech and testimony to Congress Rubin signaled the Clinton Administration was ready to repeal Glass-Steagall:

“The banking industry is fundamentally different from what it was two decades ago, let alone in 1933.” He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. “U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically,” said the Treasury secretary. “Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly.”

A year later Sanford Weill set in motion the forces that would finally end Glass-Steagall. Weill proposed the most audacious financial merger of in American history: he would merge one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and the largest commercial banks (Citibank) in America. The problem was the merger was illegal in terms of Glass-Steagall.

Weill convinced Greenspan, Robert Rubin and Clinton to sign off on a merger that was illegal at the time, with the expectation that Congress would repeal Glass-Steagall. Charles Geisst, a professor of finance at Manhattan College adds in a Frontline Interview:

Part of [Weill's] deal with the Federal Reserve was to get rid of all Glass-Steagall violations in the new Citigroup within two years. Otherwise, he would have been faced with a divestiture of a company which had just been put together, because of an old law which is still on the books. So it clearly behooved him, and many other people in the financial services industry who wanted to accomplish essentially the same sort of thing in the future, to push to get Glass-Steagall repealed.

So they pushed hard?

Pushed very hard. … They pushed so hard that the legislation, HR10, House Resolution 10, which became the Financial Services Modernization Act, was referred to as “the Citi-Travelers Act” on Capitol Hill. ..

The ” Citi-Travelers Act” went under the benign-sounding name of the Financial Services Modernization Act of 1999 and, like Glass-Steagall it has become known for the key sponsors of the bill as the Gramm-Leach-Bliley Act, for Republican Senate Banking Committee Chair Phil Gramm, House Banking Committee chair James Leach, and Virginia Representative Thomas Bliley.

The complete story of Bill Clinton’s role in the repeal has previously been told on this site. Suffice it to say, Bill Clinton gave Sanford Weill one of the pens used to sign the repeal of Glass-Steagall.

Aiding and Abetting the Enemy

So is bringing up Bill Clinton’s complicity in the repeal of Glass-Steagall aiding and abetting the enemy? Only if you believe that Bill Clinton and the Democratic Party are one and the same. In fact it is my belief that in their capitulation to the Republicans represented not only by the repeal of Glass-Steagall but support of the Bush tax cuts, the Iraq War and other measures, elements of the Democratic Party have aided and abetted the enemy, abandoning the core belief of Liberal America that guided Bryan, Wilson, FDR, Harry Truman, Lyndon Johnson and John Kennedy.

Harry Truman said it best:

If it’s is a contest between a Republican and a Republican they will vote for the Republican every time.

As for THIS election, one thing is clear, if you vote for John McCain you are probably going to get Phil Gramm as Treasury Secretary or some other high post in a McCain Administration. God help us all then.

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