Proposals to fix the financial crisis are popping up like mushrooms in a lawn after a rain and are just as useful. Around here they call them fairy rings, an apt description of some of the ideas I have seen such as those coming from a White House that seems to have fairy dust in its eyes. Several years ago when I said that George W. Bush would go down as the worst President since Herbert Hoover, I did not think that he would do a literal Herbert Hoover and leave us with the worst mess since the Great Depression.
Liberals and Conservatives alike wonder if the fairy dust in the White House has not had an impact on rational thinking. Right now the President who has rung up the largest federal debt in history proposes to add to that burden by bailing out financial institutions with an astounding amount of money. Contrary to reports in the press, which can never seem to do the research necessary to write a decent story, this is NOT the first time the government has proposed to bail out business. Richard Nixon bailed out aircraft manufacturer Lockheed and the Penn Central Railroad. Jimmy Carter bailed out Chrysler. In all three cases the Presidents advanced the rationale that each industry was essential to the American economy.
What makes the Bush bailouts unprecedented is their scope–and their insanity. With each passing day, the White House resembles an ominous specter from the past when Herbert Hoover struggled with the rising crisis of the Depression. Hoover, to his credit, at least had some principles governing his proposals. George W. Bush appears to have ingested too much fairy dust.
Neither Bush nor many of the others advancing their pet schemes have thought to do two things: first, to start with principles and values and second to go back to the original source, the Glass-Steagall Act, whose repeal is one of the main causes for this mess.
Obama’s Principles
The crisis has provided the first glimpse of the kind of Presidencies we might expect from Barack Obama and John McCain. To his credit, Obama yesterday outlined a series of principles that would govern his approach to the crisis. John McCain has yet to do so, at least in the comprehensive fashion of Obama. If you need no other reason to vote for Obama, this is it, for if we don’t have a leader who governs from principle we end up with fairy dust.
As those who regularly read this blog know, I am big on values and principles. Anyone who has studied leadership also knows that true transformational leadership begins with values. A leader must have a well-aligned moral compass to navigate through the perfect storm this crisis threatens to become.
While I might take issue with Obama’s list, quibbling over details is not the important thing. What is IMPORTANT is that we know this President will govern from principle and he will level with the public about those principles. After two decades of Democratic Party triangulation and waiting for a “values Democrat” it looks like we may finally have one. Now we will wait to see if the same reporters who hyped George W. Bush as the “values President” will do the same for Obama.
I am not sure quite how to react to finding many of the principles I advocated in a recent essay showing up on Obama’s list. Here are Obama’s principles straight from his web site:
First, the plan must include protections to ensure that taxpayer dollars are not used to further reward the bad behavior of irresponsible CEOs on Wall Street.
Second, the power to spend $700 billion of taxpayer money cannot be left to the discretion of one man, no matter who he is or which party he is from. I have great respect for Secretary Paulson, but he cannot act alone. We should set up an independent board that includes some of the most respected figures in our country, chosen by Democrats and Republicans, to provide oversight and accountability at every step of the way.
Third, if taxpayers are being asked to underwrite hundreds of billions of dollars to solve this crisis, they must be treated like investors. The American people should share in the upside as Wall Street recovers.
A few of the principles I advocated in a recent essay included:
The first thing is that in exchange for any government bailout, upper level management should be forced to forfeit all stock bonuses and other pay as part of the settlement.
With people calling for a Congressional investigation of the Iraq War, what we really need is a Congressional investigation of the repeal of Glass-Steagall.
The banks have to agree to play by the rules.
Unfortunately, we cannot bring Glass-Steagall back from where Phil Gramm buried it, but we can demand that the PRINCIPLES behind Glass-Steagall become the pro quo for any quid spent on a bailout.
Note both of us place penalties on the executives responsible for this mess at the top of the list. When Friday’s debate takes place I hope Obama will push these principles HARD, because they not only represent a substantial difference with John McCain; they also will resonate with the American people.
The Missing Principles: First, Investigation
Since this site seems to have become where people come for information on Glass-Steagall, a bit of history is in order. People have forgotten that Glass-Steagall was only made possible by a series of Congressional investigations spearheaded by Ferdinand Pecora between 1933 and 1935. Without the evidence gathered in the Pecora hearings it is doubtful Glass-Steagall would have been as far-reaching, for the corruption Pecora uncovered resulted in a huge public outcry against the abuses of the banks.
In testimony last October 2 before the Housed Committee on Financial Services economist Robert Kuttner suggested:
I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.
Pecora was the former Assistant District Attorney of New York County when he was appointed as special counsel to the subcommittee investigating the financial industry. One o the biggest scandals Pecora uncovered is the famous Insull stock manipulation reminiscent of the Enron scandal in which Insull Utility Investments, Inc., head Samuel Insull Jr. testified how his family manipulated investments so that in one case they made over $25 million on an $11 million scheme.
In a 1933 speech before the New York Elks Club Pecora stated that his investigations had shown:
How men of might–not because of principle but because of economic power and wealth–have by the waving of a hand and the adoption of a resolution have taken millions and millions of the hard-earned pennies of the people and turned them into gold for themselves.
When this nation again comes to days of plenty and prosperity, let us seek to make it impossible for water and hot air to be sold to men and women of America for gold taken from their savings. [New York Times, February 19, 1933]
The headlines of misdeeds uncovered by Pecora poured from the press in 1933. There are pages of them in the New York Times index for the first few months of 1933 alone. The Pecora hearings were just what Franklin Roosevelt needed to prod Congress into enacting the sweeping banking legislation that he advocated to resolve the crisis and prevent another. In effect, Pecora became the main driver for change in the system.
That we need the equivalent of the Pecora hearings today seems a no-brainer, but both Parties are afraid to do so for fear such hearings will uncover misdeeds on both sides, particularly pertaining to the repeal of Glass-Steagall. Certainly Phil Gramm would not welcome such hearings.
Phil Gramm
With Enron now faded into memory, we forget how much prominent Republicans were involved in that debacle, perhaps none more than Phil Gramm. To begin, Gramm’s wife served on Enron’s Board of Directors, by one estimate bringing between $900,000 and $1.8 million to the Gramm household. Gramm himself was the second largest recipient of Enron campaign contributions in addition to benefiting from over $4.6 million from the financial corporations over the previous decade.
But that was not the end of Gramm’s manipulations for Enron. An article by Paul Kiesel details how far Gramm was willing to go to help his benefactor. According to Kiesel shortly after the election of George W. Bush:
Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision — lobbied for by Enron, a major campaign contributor to Gramm — that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities.
So let’s place Phil Gramm as witness number one in the investigation.
Glass-Steagall Provisions
A second thing missing from Obama’s proposals are the provisions of Glass-Steagall that might have prevented this crisis. The Gramm-Leach-Bliley Act authored by McCain campaign co-chair Phil Gramm abolished several key provisions of Glass-Steagall that must be reinstated.
Among other provisions, GLB repealed Sections 20 and 32 of the Glass-Steagall Act:
- Section 20 – prohibited any member bank from affiliating in specific ways with an investment bank;
- 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.
Interlocking directorates helped to contribute to this mess. To critics of Wall Street they have long represented a source of frustration and corruption. Talk about the fox guarding the hen house. Carter Glass, Franklin Roosevelt and others involved with writing and passing Glass-Steagall knew that if the CEO’s of financial institutions sat on each other’s boards they would have little inclination to curb questionable practices.
Interlocking financial relationships was the second fear held by Carter Glass and FDR. Those interlocking relationships have proved to be one of the prime culprits behind the current crisis.
To Big to Fail
In my last essay I wrote about the insertion of the “too big to fail” provision into Gramm-Leach-Bliley. That needs to be stricken from the books. It is the most dangerous and outrageous piece of economic legislation ever written by the United States Congress. It represents the equivalent of the “separate but equal” segregation legislation of the post-Reconstruction Era.
In the first place, anti-trust legislation either needs to be enforced or rewritten so no corporation becomes too big to fail. That this country has reached such a point must have the founders of this country wondering what America has become.
Obama’s Clinton Problem
As this crisis deepens it has become clear Barack Obama faces a Clinton problem. Bill Clinton’s role in the repeal of Glass-Steagall is public record. The GOP has already tried to blame the financial crisis on the Democrats, in part because of Clinton’s role. I predict John McCain will bring this up in the debates, if only to deflect criticism from Phil Gramm, who is the real villain.
How Obama handles his Clinton problem could well decide whether he wins in November. A bit of advice: he needs to separate Bill from Hillary. Hillary needs to separate herself from Bill. If Hillary Clinton wants to run or President should Obama lose, her future also depends on how she handles the repeal of Glass-Steagall.
Conclusions
So far Barack Obama has made an admirable start towards dealing with the financial crisis. He has shown that as President he will govern from principle, not triangulation.
The problem is that like much else with Obama, he does not go far enough. The American people do not want halfway measures to resolve this crisis, nor do they want business as usual. Obama needs to have the courage to utter two words: Glass-Steagall. Barack Obama had no part in the Gramm-Leach-Bliley Act. By pointing that out and linking it to his message of change, he could give the American people what they long for–someone whose hands are clean of this mess and who has the principles to clean it up.
The title of this essay purposely has a double meaning. What the American people hope is that the “fix” is not in with regard to this crisis as it was with the repeal of Glass-Steagall. If ever there was a time to revive the principle of Liberal America that government exists to keep the playing ield level, this is it.
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