The Corbett Report has done excellent reporting, but it also parrots Libertarian/Austrian economics, which the Preservation Society disavows rigorously (though many of Us at the Preservation Society support it in practice for its pro ruling class tendencies).
The Truth About Glass Steagall is a case in point. Corbett seems to be a sporting contrarian. Like Christopher Hitchens, who took up the challenge of spinning the Iraq war as a good, Corbett tries his hand at spinning the partial repeal of Glass Steagall into a non cause of the 2008 financial crisis. James should know better. It’s an open and shut case.
Carl Leven summarized the crisis fairly well in a subcommittee hearing report.
In accordance with Corbett’s reporting, We are to believe that the efforts of bank lobbyists to repeal legislation that separated investment banking and commercial banking was done without the profit interests of the big Wall Street players in mind. This is deregulation after all, what many politician claims to be necessary to a good economy.
Some of the Dream Makers
Phil Gramm, Chair of the Senate Banking Committee in 1999, led the Republican charge against repeal. He received hundreds of thousands of dollars from the very entities that made billions in fees and bonuses. The repeal act was named partly after him — the Gramm-Leach-Blilley Act. His top five contributors between 1997 to 2002 were financial institutions Bank of America, JPMorgan Chase & Co., Credit Suisse Group, Security Traders Assn., and the Security Traders Assn.
At the signing ceremony of Gramm-Leach-Blilley (also known as Financial Modernization Bill) he said:
In the 1930s, at the trough of the Depression, when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets. We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth, and we promote stability, by having competition and freedom. I am proud to be here because this is an important bill. It is a deregulatory bill.
What a boon it was for Us! For the masses — not so much. But since were the lower orders ever the priority for the higher? “Freedom and competition” took the watchdogs away and let Wall Street play. This is only common sense in a ruling class society. The masses have allowed Us to encourage a lucrative but destructive racket.
Then, in 2002, Gramm, upon retiring from the Senate, immediately joined Swiss investment house UBS. This was clearly a reward for his service to society.
Robert Rubin, Clinton’s Treasury Secretary in 1999, came from — you guessed it — Goldman Sachs. He aggressively pushed Clinton to deregulate and repeal.
From the Guardian:
In what Cutter [Rubin’s deputy] described as “an action forcing event”, he wrote to Clinton on 21 February, telling him Rubin wanted to announce the policy [of repeal] before it was raised by the House banking committee on 1 March.
“In order to position Secretary Rubin – rather than any of the regulators – as the Administration’s chief spokesman on this issue, the Secretary intends to discuss the Administration’s position at a speech which will be covered by the press in New York on 27 February,” wrote Cutter on 21 February.
“It is therefore necessary to have an agreed-upon Administration position by the end of the day on Friday, 24 February.”
“And then there was LaFalce’s retirement party, in 2002, where two lobbyists representing Bank of America, Morgan Stanley, and other financial interests sang a humorous tribute named “Big John.” John LaFalce, ranking Democrat on the House Financial Services Committee at the time also raked in the big bucks. Between 1989 and 2000, his top contributors were JPMorgan Chase & Co., American Bankers Assn., Citigroup Inc., Bank of America and the National Assn of Realtors.
At the signing ceremony, referenced above, LaFalce, even as he claimed that repeal “forestalls the mixing of commerce and banking”, parroted Gramm when saying, ” It advances competition at home. And it increases our competitive ability to compete abroad in our financial services industry.”
Does Corbett take the statements of these politicians, with their ties to Wall Street and corporate America at face value? What could such statements about “competition” mean?
At the same ceremony, LaFalce also said,
I view this bill as a great codification and regulation of the existing financial services system and the future dynamic financial services system, a financial services system that has been brought about primarily through the unbelievable breakthroughs in technology and the marketplace.
The highlight of the signing ceremony was champagne and a cake “upon which was written “Glass-Steagall, R.I.P., 1933-1999″.
Why so much enthusiasm for supposedly insignificant legislation? Clearly, if it didn’t hurt the economy, it certainly didn’t help.
But even if we were to drink the Kool-Aid and believe these politicians at their word, then one must conclude that these individuals — politicians and their Wall St handlers — are incompetent boobs. Whether they intended to facilitate fraud or not, they all predicted a “dynamic future” that would spur “freedom and competition”.
Yet the very opposite of a “dynamic future” transpired. Talk about an embarrassing miscalculation! Any professional found to be so absurdly wrong would not have much respect from their peers, but in politics it can lead to lucrative “consulting” gigs a la Gramm.
Sam Stein at HuffPost quotes a few Senators:
“The concerns that we will have a meltdown like 1929 are dramatically overblown,” said Sen. Bob Kerrey.
Senator Chris Dodd said, “I welcome this day as a day of success and triumph.”
Hindsight maybe 20/20 but some did see what was coming with deregulation. In the same article Stein also quotes those who knew better. Senator Byron Dorgan said, “’I want to sound a warning call today about this legislation,’ he declared, swaying ever so slightly right, then left, occasionally punching the air in front of him with a slightly closed fist. ‘I think this legislation is just fundamentally terrible.'”
“The late Sen. Paul Wellstone also opposed the bill, warning at the time that Congress was ‘about to repeal the economic stabilizer without putting any comparable safeguard in its place.’”
Of course one may object that politicians taking big money from Wall Street, those same institutions that made billions through mostly criminal activities in the aftermath of repeal does not constitute collusion or intent. It was all just coincidence. Michael DuVally, a Goldman Sachs spokesman told McClatchy Newspapers,
that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to “hedge” against a housing downturn.
The “End Game” Memo
And then there is the “End Game” Memo written in 1997 by Tim Geithner to his boss Treasury official Larry Summers who in turn worked for Clinton’s Treasury Secretary Robert Rubin. As investigative reporter Greg Palast remarked
what was the use of turning US banks into derivatives casinos if money would flee to nations with safer banking laws?
The answer conceived by the Big Bank Five: eliminate controls on banks in every nation on the planet – in one single move. It was as brilliant as it was insanely dangerous.
Thus the memo advised Summers to personally “touch base” with the bankers of the big five: Goldman Sachs, Merrill Lynch, Bank of America, Citibank and Chase Manhattan. Geithner conveniently included their direct-dial numbers in the memo.
How could they pull off this mad caper? The bankers’ and Summers’ game was to use the Financial Services Agreement, an abstruse and benign addendum to the international trade agreements policed by the World Trade Organization.
Until the bankers began their play, the WTO agreements dealt simply with trade in goods–that is, my cars for your bananas. The new rules ginned-up by Summers and the banks would force all nations to accept trade in “bads” – toxic assets like financial derivatives.
Until the bankers’ re-draft of the FSA, each nation controlled and chartered the banks within their own borders. The new rules of the game would force every nation to open their markets to Citibank, JP Morgan and their derivatives “products.”
And all 156 nations in the WTO would have to smash down their own Glass-Steagall divisions between commercial savings banks and the investment banks that gamble with derivatives.
Recall LaFalce’s words above: “And it increases our competitive ability to compete abroad in our financial services industry.”
Of course these countries had to go along with the program because the US held major trade deals or financial assistance over their heads. But the Glass Steagall partial repeal had nothing to do with the mortgage crisis, remember?
A major part of Corbett’s presentation centers around Austrian ideologue Tom Woods, a senior fellow at the “free market” citadel Mises Institute. Corbett’s video seems to take his conjectures and spin at face value.
It Shocking that anyone could accept the simpleton errors in Woods’s analysis. Woods, himself, takes his central thesis from an article written by Steve Pearlstein of the Washington Post:
Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.
Lehman did not cross over themselves but they did acquire mortgage lenders:
In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation). Lehman’s acquisitions at first seemed prescient; record revenues from Lehman’s real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management.
Who but these Libertarian ideologues doesn’t know that toxic securities were widely sold on the market? Once the Glass Steagall firewall was taken down, the mortgage “industry” became all about quantity not quality. Buying a mortgage lender was like getting the goose that lays the golden egg. Is it really so difficult to figure out that the firms affected by repeal of Glass Steagall now had an incentive to trade and mass produce mortgages, chopp them up and put them out on the market? And as Lehman Brothers demonstrated all you had to do was acquire mortgage lenders, while “staying away” from mortgages yourself.
How come these experts were not aware of the criminal activities of Goldman Sachs among others? Everybody bought toxic securities thinking this trash was “AAA”-rated. Why weren’t the agencies punished? Why are they still paid attention to? All sorts of entities from hedge funds to pension funds and mutual funds held toxic derivatives. The big banks took insurance out on these instruments knowing full well they would explode one day and drag down the country. Insurance companies like AIG collapsed because they insured these toxic securities unleashed by repeal.
Companies held toxic waste, and the point was to dump them onto unsuspecting suckers and collect the dough before the music stopped, which left some to holding the bag.
Pearlstein, the apologist, goes on to name other financial collapses that occurred before the partial repeal of Glass Steagall, as proof that repeal was not to blame. But since when has the existence of other crimes been proof of anything, except that this click of high rollers, called the ruling class, is willing to do it again, simply because it has done it before?
The masses are to believe that these poor defenseless banks were forced into these activities, and that presumably left to their own devices they would not have acted so unscrupulously. If that is so why didn’t they instruct their bought and paid for politicians and media to sound the alarm rather than celebrate the anticipated windfall?
They had no choice we are told because if they did not participate in this suicidal feeding frenzy they would have been at a competitive disadvantage. If that is the case, then doesn’t it demonstrate the utter stupidity of the system? We love capitalism, but it is indeed irrational.
For the Libertarian, like their Liberal and Conservative comrades, common sense is the enemy. Unlike Liberals and Conservatives, the Libertarian is convinced that government, not those who own it and operate it are the problem. This is a service We at the Preservation Society appreciate. But this complete colonization of otherwise intelligent individuals is also another symptom of Our suicide by success.