The worldwide economic crisis was created in the United States. It developed in incremental stages due to legislation passed by Congress at the behest of Wall Street interests who sought a worldwide market with few or no restraints. Certainly our Congress wishes it could turn back the clock but that is impossible. But one of the real questions they must answer is what they are doing now to repeal those destructive bills as we see their damage.
It began with the repeal of the Glass-Steagall Act which was enacted in 1933 to halt the collapse of banks during the depression. One of its key provisions was the limitation of banks to act as financial institutions. In 1999 the Gramm-Leach-Bliley Act was introduced by three Republican legislators and passed by an overwhelming GOP majority in both the Senate and House. Effectively, the bill allowed banks to integrate themselves with other financial institutions such as insurance companies and brokerage firms.
The final piece of the Ponzi legislation was enacted in 2000. It was titled the Commodity Futures Modernization Act of 2000 and attached to an omnibus spending bill. The bill was introduced by the infamous Sen. Gramm, Sen. Leach and Rep. Bliley among others. Essentially it deregulated a number of financial instruments including credit default swaps. That bill was directly linked to causing the Enron bankruptcy and subsequently the current economic crash. Banks which were previously denied participation in high risk instruments were the biggest casualty along with AIG who insured the swaps without providing any reserves for the potential losses.
There is another element that has accelerated our current crisis. Beginnings in 2008 companies were required to apply FAS Statement 157 to value their assets. It effectively says that assets on their books should recognize the current value of an asset at its going rate. Of course in an expanding economy it allowed assets to take advantage of their value increase. However it also devalues depreciating assets. In our current market the biggest problem is determining the value of thinly traded assets such as derivatives where there often is no established market. As a result many financial institutions are forced to value default swaps and packaged mortgages at near zero on their books. That is despite the fact that mortgages are never worthless. While the value of a house might have depreciated 30%, the remaining 70% plus the value of land remains solid. This mark to market rule is currently being discussed and, hopefully, will be amended to allow a more representative asset valuation.
As a recommendation, let’s amend the mark to market standard. That one step will increase the asset valuations of financial companies. Secondly, Congress must allow for the effective regulation of any asset held by a financial institution. In the meantime they should suspend the trading of new default swaps if not the prohibition of their use. Next, we must get banks back to being banks. We must admit that our banking institutions are intended to protect the integrity of the American capitalist system. They must not be allowed to use funds to gamble on high risk securities to enhance their stock values and executive bonuses. In the end the conservatives have proven to be ones who have driven the economy into a near depression. They are the ones forcing America to apply rigid standards to a wrecked economy. The irony is undeniable.