To understand the current economic meltdown we need to look at how our political system “works,” which companies and industries gave campaign contributions to whom and what the contributors received as payback.
According to Obama Urges Regulation in Wake of Housing Slump – NY Times 3-27-08 “the banking and insurance industries spent more than $300 million on a successful campaign to repeal the 1933 Glass-Steagall Act in 1999.” (Mother Jones puts this figure at $350 million).
To curb widespread speculation and conflicts of interests by banks in the run-up to the Great Depression the Glass-Steagall Act was a regulatory measure approved by Congress that did several things. It separated investment and commercial banking activities and, by an extension of the Act in 1956 prevented banks from underwriting insurance policies (see this Investopedia Forbes Digital site for more on Glass-Steagall).
As for the anti-Glass-Steagall “successful campaign” we can thank the Gang of Three: Senator Phil Gramm (R-Texas, served from 1985 to 2002), Representative Jim Leach (R-Iowa, served from 1977 to 2007) and Representative Thomas J. Bliley, Jr. (R-Virginia, served from 1981 to 2001) for giving us deregulation – and exactly what the banking, insurance and investment communities wanted – in the form of the Gramm-Leach-Bliley Act.
This Act, which gutted and repealed many of the sensible reforms (including Glass-Steagall) put into place after the Great Depression wasn’t passed because such a drastic overhaul of our economic policies was needed. It was passed simply as payback to the Gang of Three’s campaign contributors, and then some.
From 1993 through 1998 the securities and investment industry gave Gramm $670,894 in campaign contributions (see The Center for Responsive Politics http://www.opensecrets.org/ ). According to an excellent summary of America’s economic history from Mother Jones (Where Credit Is Due: A Timeline of the Mortgage Crisis 7-2-08) the number is higher: Gramm accepted $4.6 million from the finance, insurance and real estate industries over a ten-year period.
Insurance giant AFLAC, Inc. gave Gramm $61,000 while Andersen Worldwide, the largest accounting firm in the U.S. – until it crumbled with the infamous Enron – gave him $60,100 from 1993 through 1998. Gramm was also in Enron’s pocket, see Additional Reading below.
And if ever a state should be lopped off of the continental United States and pushed out to sea it’s Texas for giving us Mr. Gramm, the likes of Enron and the worst President ever, George W. Bush (and I know W is a blueblood from Connecticut but he grew up in the Lone Star state).
Representative Jim Leach’s biggest campaign contributor from 1997 to 1998 was AEGON USA (its website boasts AEGON “is one of the world’s largest life insurance and pension groups, and a strong provider of investment products”) and gave him $3,708. According to The Center for Responsive Politics the insurance industry gave Leach a total of $10,483 from 1997 to 1998.
As for Representative Bliley his top contributor from 1997 to 1998 was the financial services giant PricewaterhouseCoopers which gave him $12,500. Overall for the same time period the securities and investment industry gave him $20,000.
So, what did the financial industry paid-for Gramm-Leach-Bliley Act give us? Suddenly for the first time in 66 years home mortgages were allowed to be bundled together with securities and sold to investors. Mortgage lenders and Wall Street ran amok. According to some great radio reporting from NPR (go to www.thislife.org/Radio_Episode.aspx?sched=1242 and listen to “The Giant Pool of Money”) by around 2003 the majority of qualified home buyers had mortgages. To sell more home loans – to customers and Wall Street – mortgage lenders interviewed by NPR said the guidelines for lending got looser. NINA (No Income No Asset) loans became a hit and people didn’t have to prove they had a certain amount of money, all they had to do was simply state they had X amount of dollars. And they got approved for a mortgage.
The lending banks didn’t care because they no longer held onto a loan for 30 years like they previously did. They held onto it for a few months then sold it to Wall Street. The folks on The Street then bundled together the loans and sold them to investors. The mortgage brokers and Wall Street people made their hefty commissions and bonuses while passing on the risk to investors – until everything collapsed.
A Ponzi scheme? Real close. A house of cards? Absolutely. And granted, there are plenty of home buyers who should have never signed the mortgage papers and taken the home or loan but they were tempted, succumbed and now we’re in this crisis.
The politicians too, were tempted as usual, with campaign contributions. They took the money and in return passed favorable legislation for their contributors. Our economy had its ups and downs during the 66 years Glass-Steagall was on the books but never saw anything like what’s happening today.
“Politics is broken,” to quote Bill Bradley, the former senator from New Jersey, and needs a drastic overhaul. Campaign funding (and lobbying) must be curbed and strictly regulated so special interests and big businesses can’t buy legislation. It’s been happening for decades, long before Mr. Bradley’s comments, and the current economic crisis proves beyond a doubt that we need a radical new way of conducting campaigns.
One thing I propose to reduce the amount of money candidates need to raise is to completely ban all political advertisements from television, radio, newspapers, magazines and the Internet (for more on this see: Ban Political Advertising to Restore Our Democracy).
The costs to produce and place these ads are astronomical. And while I’m certainly all for free speech when, in terms of political ads, it’s only available to instant multi-millionaires who are then beholden to their contributors, it’s grossly corrupt, abused and inefficient.
If political ads were banned candidates could still use the Internet to get the word out about their ideas – just not in the form of ads anywhere. They could still have their websites and voters could simply go to their sites to see where the candidates stand on the issues.
While stumping on the 2008 campaign trail candidate Obama railed against Democratic and Republican administrations for regulatory failures that contributed to the economic meltdown and blamed the crisis on deregulation in the financial sector.
“Our free market,” he said, “was never meant to be a free license to take whatever you can get, however you can get it… Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one—aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight.” (It’s the Deregulation, Stupid – Mother Jones 3-28-08).
President Obama is certainly not immune to all the campaign cash that gets tossed around. The above-referenced Mother Jones article points out as a candidate Obama accepted $6 million in campaign contributions from investment and securities companies. He also ran on a platform of change. It’s now gut-check time, Mr. President.
Additional Reading:
To see the government’s summary of the Gramm-Leach-Bliley Act go to http://banking.senate.gov/conf/grmleach.htm. Toward the end of the second line of the second bullet point note this gem the titans of Wall Street must have literally laughed all the way to the bank with: “Activities that are “complementary” to financial activities also are authorized.”
Between 1993 and 1998 Enron gave Gramm $83,750. To see how Mr. Gramm and his wife Wendy (who, while chairwoman of the Commodity Futures Trading Commission helped Enron to a “financial boon” by removing interest-rate swaps and energy derivative contracts from federal oversight – and then, five weeks later joined Enron’s Board of Directors) contributed to Enron screwing California consumers out of an estimated $40 billion through false electricity shortages see The Baltimore Chronicle’s 5-19-08 article: McCain Defends ‘Enron Loophole’.
To read an excellent, but technical article about our economy’s demise see: What Cooked the World’s Economy? It wasn’t your overdue mortgage – The Village Voice 1-28-09
For an excellent argument on how laws like the Glass-Steagall Act were beneficial to our economy see the NY Times Op-Ed piece The Value of ‘Other People’s Money’ 2-7-09.
Mother Jones’ Where Credit Is Due: A Timeline of the Mortgage Crisis 7-2-08 is a particularly fascinating look at the history of our economy. In another lobbying/campaign contribution situation it points out how in 1998, when Citicorp and Travelers announced the “biggest-ever corporate merger” valued at $70 billion the deal was technically illegal under Glass-Steagall. No problem if you have $12 million on hand, like Citi’s CEO Sandy Weill did. He spent it on a campaign to repeal the law.
cosmic poaching 