The stuff I have been seeing in both the mainstream media and blogdom for the last few days while fighting off a bad case of something seems to veer off in two strange directions: it is either so simple-minded that it is an insult to print it or it goes off into esoteric financial explanations as if trying to pretend the author knows what he or she is talking about when the fact they are unable to put explains things in plain language suggests they don’t have any more of a clue than the rest of us. So in the interest of clearing up a few things here are the A, B and C of the financial mess we are in.
A Is for Accountability
For a long time the mantra of the Republican Counterrevolution has been “accountability.” They can get pretty mean when applying it to education, but when it comes to Wall Street, that is another story. What the press seems to have ignored is that there are PEOPLE behind this mess, people who managed these companies and got them into the difficulty they are in now, people who did some really stupid things and now want us to pick up the check.
Has this ever been true before in any other industry, at any other time? Apparently if you bankrupt a company to the point where American taxpayers are forced to clean up your mess, you suffer no consequences. This is outrageous! 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.
I heard an analyst on the radio the other night on my way to pay for $100 groceries and $4 gas and he said AEG owned a huge fleet of airplanes that could be sold off to repay the government bailout. Why not sell off a few CEOs? In exchange for the bailouts the government ought to freeze the assets of all management and sell them off. Let them see what it is like to live on a normal salary and have to pinch pennies due to their financial stupidity. Maybe if they learned to manage a home budget like millions of Americans they might learn how to manage a company.
One more rant and then I am done. I don’t often rant on these pages but this situation calls for a good old-fashioned rant. We always hear how schools and other government institutions ought to be run like a business. After this mess anyone who says that ought to have his head examined, to quote Harry Truman, who in 1948 said that about the farm crisis the GOP had gotten us into.
Now, on to the real meat. For two years now I have written about how the demise of one of the crown jewels of the Depression, the Glass-Steagall Banking Act, helped to create the current financial crisis. I won’t bore you with yet again another recitation of that sorry affair other than to point out that the chief author of the bill that repealed Glass-Steagall was one Phil Gramm, who by coincidence is supposedly the chief economic advisor for one John McCain.
Lately the media seem to be having as much trouble locating Gramm as they have Osama bin Laden. Maybe he, too, is in a cave somewhere. He ought to be. The damage his bill did to the American economy makes running planes into the World Trade Center and the Pentagon seem like small potatoes. Why haven’t the media called Gramm to account? Why haven’t they asked John McCain what the architect of the current mess is doing on his campaign staff? Why doesn’t some talk show host grill him the way Bill O’Reilly grills the latest liberal of the week. (Aside–note who Sarah Palin is doing her latest interview with).
Instead of ranting about the evils of al Qaeda maybe it is time we ranted about the evils of the Counterrevolution. Why? Because the Republican Counterrevolution has dedicated the last fifty of so years to rolling back the New Deal based on the half-baked notion that the market can take care of itself and that government ought to stay out of the market. So slowly they have eliminated regulations, especially in the financial industry, and guess what has happened?
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. Phil Gramm ought not to be managing a Presidential campaign; he ought to be in court!
Now all of a sudden the same people who said “Government is part of the problem” are holding out their hands to government to bail them out. When schools, the victims of falling highway bridges, bankrupt farmers or people just down on their luck cried out for help over the last two decades, the Counterrevolutionaries lectured about “tax and spend” or the evils of “welfare” while preaching that government has no business bailing out people. But apparently government does have the business of bailing out business.
The main thing to remember about Glass-Steagall besides the role of John McCain’s economic advisor in its demise is that it was set up as a win/win situation. In return for government agreeing to insure their deposits (through the Federal Deposit Insurance Corporation), the banks had to agree to play by the rules, the most important provisions of which were forbidding interlocking directorships and prohibiting banks from getting into the stock market. Phil Gramm ended all that.
Yet today as the bailouts continue, no one is demanding the quid to go along with the pro quo. 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.
B is for BIG (As in Too Big to Fail)
When the Gramm-Leach Bliley Act which repealed Glass-Steagall passed, it contained a little-noticed-at-the-time provision that actually wrote the term “too big to fail” into federal law.
The most troubling section of GLB is Section 108, titled USE OF SUBORDINATED DEBT TO PROTECT FINANCIAL SYSTEM AND DEPOSIT FUNDS FROM ‘‘TOO BIG TO FAIL’’ INSTITUTIONS. It provides for a study of:
The feasibility and appropriateness of establishing a requirement that, with respect to large insured depository institutions and depository institution holding companies the failure of which could have serious adverse effects on economic conditions or financial stability, such institutions and holding companies maintain some portion of their capital in the form of subordinated debt in order to bring market forces and market discipline to bear on the operation of, and the assessment of the viability of, such institutions and companies and reduce the risk to economic conditions, financial stability, and any deposit insurance fund.
Note the language of this section. For the first time in the history of the American economy certain financial institutions are being judged “too big to fail.” Think about the implication of that. A company now has such power and influence that the government cannot allow it to fail. This is corporate welfare at its worst. If a company gets to a certain size we will designate it “too big to fail.” How would you like your home to be designated too big to fail or your job? This language as much as any other speaks of the end of the ideals that powered the New Deal. It is liberalism turned upside down.
When I wrote the above paragraph back in May, little did I know that only a few months later we suddenly would have a long line of financial institutions claiming they were too big to fail. The Counterrevolution cannot have it both ways. It cannot preach the sacred values of the market and then when sins occur suddenly demand absolution for those sins because they are too big!
When Katrina devastated New Orleans you would have thought that would define “too big to fail,” but George W. Bush dallied at his ranch while unspeakable horrors took place in the Superdome. When the latest hurricane threatened the Big Easy all of a sudden we found out that the problems still had not been fixed. Now you can take ghoulish tours of New Orleans that show the parts of the city that are still literal ghost towns. Apparently they are not too big to fail.
There are lots of too big to fail problems in America today. There is, for example, the Washington, D.C. public school system which is in such dire straights that the Washington Post–which has seen everything–was appalled by the state of the system from boilers that did not work, to teachers being assaulted in the hallways to a financial mess so bad no one can account for the money. There is Muderdelphia, where people are killing each other at a rate not too far from that of Baghdad. There is that bridge that fell into the river in Minnesota that like a canary in a mineshaft warned us of a national infrastructure too big to fail.
The too big to fail provision that Phil Gramm inserted into to thr repeal of Glass-Steagall reveals the ultimate hypocrisy and danger of the Republican Counterrevolution. The GOP is not really opposed to big government or government intervening in the market when that intervention benefits big business. We are back to the end of the nineteenth century–the McKinley era and earlier that Karl Rove thinks of as America’s golden age–when government intervened often on the side of business, for example granting many special faors to the railroads.If they had possessed Gramm’s creativity they would have said they were “too big to fail,” but instead just said they were necessary for the country to function.
Perhaps the worst ruling ever made in the history of the Supreme Court was a railroad case–Santa Clara County v Southern Pacific Railroad, a 1886 decision in which the Court held that corporations are people and thereby entitled the same Constitutional rights. There is something in Chief Justice Waite’s bizarre statement that smacks of “too big to fail:”
The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of opinion that it does.
In fact Gramm’s “too big to fail” goes beyond Santa Clara in that it baldly states BIG corporations enjoy MORE rights than the average person by the nature of their very size. This is not a market society it is an oligarchy in which, in Orwell’s famous words, “some animals are more equal than others.”
Yet as we are finding out, “too big to fail” was precisely the cause of failure. Instead of studying supply and demand, the analysts of the crisis would be wise to study the end of the dinosaurs, for in the crisis the sheer size of these brontosaurean companies made it all but impossible for them to cope with our rapidly changing world economy.
It also finally put the lie to the “bigger is better” philosophy that has driven corporate mergers and turned our nation into a landscape of giant big box retail chains. Like the brontosaurus we are finding out there are limits to “economies of scale.” We also are finding out that allowing these mergers and acquisitions and essentially all but cutting the balls off the ideas behind anti-trust legislation, was not a great idea.
C Is for Campaign Contributions
The involvement of financial institutions in lobbying and political campaigns is a national scandal.
As the bill to repeal Glass-Steagall took form in Congress, the financial industry, particularly Citibank and Sandy Weill increased the pressure. Charles Geisst notes:
In the year previous to the Financial Services Modernization Act, the thing that overruled Glass-Steagall, Citibank spent $100 million on lobbying and public relations, which is a good indication.
Yes. They spent a small fortune, a king’s ransom, if you will, getting rid of Glass-Steagall. In fact, when thrown in with other financial firms’ lobbying, it was closer to $200 million over the short period of time.
To give you some idea of the magnitude of this effort, the Center for Public Integrity reports:
The pharmaceutical and health products industry has spent more than $800 million in federal lobbying and campaign donations at the federal and state levels in the past seven years, a Center for Public Integrity investigation has found. Its lobbying operation, on which it reports spending more than $675 million, is the biggest in the nation. No other industry has spent more money to sway public policy in that period. Its combined political outlays on lobbying and campaign contributions is topped only by the insurance industry.
In other words, in one year Sandy Weill and his buddies spent 1/4 of what the next biggest lobbying effort on record spent in 8 years! In a paper on the repeal of Glass-Steagall in the American Journal of Economics and Sociology Jill Hendrickson wrote:
The Industry’s efforts to jump-start progress on the [Senate] bill is a case study in how a well-heeled and well-organized interest group can swiftly prod Congress to move, even on an issue about which most people outside Washington and New York have little knowledge.
Nor is it surprising, according to both political science and economic literature, that the interest groups played a vital role in the timing of the 1999 deregulation. Without persistent lobbying by commercial and investment interests it is unlikely that reform would have taken place in this century.
Now jump to the present and dial in to opensecrets.org and see who are the big campaign contributors. Below courtesy of the Center for Public Integrity is the chart of John McCain:
And just to be nonpartisan here is the one for Barack Obama:
Now so people don’t get the wrong idea, let me insert the following explanation directly from the Center for Public Integrity:
Because of contribution limits, organizations that bundle together many individual contributions are often among the top donors to presidential candidates. These contributions can come from the organization’s members or employees (and their families). The organization may support one candidate, or hedge its bets by supporting multiple candidates. Groups with national networks of donors – like EMILY’s List and Club for Growth – make for particularly big bundlers.
So Goldman Sachs is not directly giving money to the candidates, employees and PACs affiliated with them are. What you see on the chart for both candidates are a lot of familiar names, some of them directly off the front pages for the past few weeks. Financial institutions represent the largest area of giving for both Presidential candidates.
The Bottom Line
So there you have it, the ABC’s of the current financial scandal: lack of accountability, “too big to fail,” and big time campaign contributions and lobbying have all fueled the present crisis. You might say the big financial institutions have bought there way into the present mess and now want we taxpayers to pick up the tab. Wonder if any of that bailout money will be used for lobbying?
Right now as i write this a McCain ad about “tax and spend” and “big government” is airing in many cities in the United States. They still don’t get it do they? and the Democrats don’t seem to understand that the financial crisis has handed them the biggest piece of ammunition they have ever had to deal with this decrepit, over-used and deceitful slogan.
Oh yes, McCain still wants to extend the Bush tax cuts, the same ones that went to the CEOs who caused this mess, the same ones that were supposed to stimulate American investment. What they stimulated was the worst economic crisis since the Great Depression.
BTW, have any of your Congressional bigshots asked if you want your money to be used to bail out these companies?
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