Back in 1999, when the United States Congress was about to pass one of the most destructive bills of financial deregulation in our time, the Gramm–Leach–Bliley Act, Democratic Congressmen John Dingell forebodingly said: “What we are creating now is a group of institutions which are too big to fail...Taxpayers are going to be called upon to cure the failures that we are creating tonight, and its going to cost a lot of money, and its coming.”
The Congressman’s ominous prediction, as everyone now knows, was entirely correct. But back in the late nineties, the overwhelming majority believed that financial regulation was an antiquated feature of the post-depression economy, preventing the free market from achieving its full potential. The main purpose the Gramm–Leach–Bliley Act was to repeal part of the Glass-Steagall Act, which had prohibited one large corporation from combining Commercial Banks, Investment Banks, and Insurance Companies under the same roof.
After Glass-Steagall passed in 1933, big banks like J.P Morgan had to choose between commercial and investment banking. J.P. Morgan chose commercial banking and spun off it’s investment operations to form Morgan Stanley. The same went for other financial institutions that had acted as both commercial and investment banks in the past.
Under the same Glass-Steagall Act, the Federal Deposit Insurance Corporation (FDIC) was formed as a temporary agency to prevent banks runs, insuring all commercial deposits of up to $2,500 dollars. By 1935, it was established as a permanent agency under the Banking Act of 1935.
It seemed only logical for the FDIC to insure the deposits of average Joes’ as long as they were not used on risky investments such as stocks, bonds, and mutual funds. Giving investors down on Wall Street the comfort of knowing that their funds were backed by the “full faith and credit of the United States Government” seemed like a disastrous measure, kind of like telling a hopeless gambler that if they lose all of their money, you’ll cover it, but if they win, its all theirs.
Bill Clinton, who signed the Gramm–Leach–Bliley Act into law, has defended himself in hindsight by saying that even before Glass-Steagall was repealed, it had “already been breached.” This is true, a year before the bill was signed, commercial bank Citicorp had merged with the insurance company Travelers Group to form the giant financial corporation Citigroup. The Federal Reserve, headed by Alan Greenspan at the time, provided the illegal institution with a temporary waiver.
Gramm–Leach–Bliley was simply the final nail in the coffin that Bill happily signed into law. After the Act, financial institutions predictably merged and became Goliath's of modern finance, or in other words, too big to fail.
While President Clinton has defended his signing of Gramm–Leach–Bliley, he has conceded that his advisors, such as Lawrence Summers and Robert Rubin, gave him the wrong advice when it came to derivatives and regulation. “I think they were wrong and I was wrong to take it,” he said in an interview after the financial crash of 2008. While there are still proponents and opponents to this day of whether the repeal of Glass-Steagall was a good thing, very few deny the risk that comes with derivative speculation.
Derivatives are financial instruments that derive value from underlying assets, such as bonds, commodities, stocks, mortgages, etc. They have become enormously complex over the past few decades, which is always preferable to simplicity for financial organizations. What many were calling “financial innovation” back in the nineties is really just financial complication. Because the more complicated something becomes, the easier it is to commit fraud and scam the financially ignorant masses.
And of course, this is what happened. Financial institutions saw the explosion of mortgage lending as a perfect opportunity for quick and easy profits, and piled them up into wonderfully complex blobs of toxic waste disguised with triple A ratings and fraudulent smiles. Derivatives, which were supposed to ‘limit’ risk, ended up exasperating and spreading risk.
Not everyone was fooled by these “innovative” financial instruments. Brooksley Born, the seventh chair of the Commodity Futures Trading Commission, opposed Clinton advisors and pushed for derivative regulation. The usual suspects; Summers, Greenspan, and Rubin all argued that derivative regulation would hurt the financial innovation that had helped create such a booming economy. Born resigned in 1999 after Congress banned CFTC from regulating derivatives.
By 2008, financial institutions that had become too big to fail were completely engulfed in these toxic and failing derivatives.
Destined to Repeat It...
“Those who don’t know history are destined to repeat it.” Is it cliche to bring up this old saying from conservative philosopher Edmund Burke? Maybe its not cliche, though it may very well be useless, as Kurt Vonnegut seemed to believe, saying: “We’re doomed to repeat the past no matter what. Thats what it is to be alive.”
Regardless of whether history is a futile endeavor, normally it takes time for human beings to forget it. A few generations at least. It took the better part of a century for the Glass-Steagall act and its regulations to be gutted and thrown into the Hudson. But when there is serious money to be made and a fine remembrance of being bailed out by Uncle Sam, well, who needs regulations when your insured by the government?
Today, fifteen years into the new millennium, the United States Congress is owned and operated by corporate America, particularly by the megabanks on Wall Street who are so crucial to our fragile economies success. After four short years, the financial elite have influenced our leaders to repeal an important part of Dodd-Frank, freeing the banks, which are bigger than ever, to use our FDIC insured deposits for derivative trading.
The type of risky trading that would have destroyed the economy if it wasn’t for the taxpayers bailing these gamblers out? Why yes, exactly that.
This provision, which was quietly thrown into the 1,600 page spending bill, was reportedly written by Citigroup lobbyists and highly promoted by J.P Morgan Chase CEO Jamie Dimon, who personally called legislators to vote for it. Legislative “riders” are provisions that are slipped into important bills, like funding the government, when they would otherwise have been tricky to pass with debate and transparency. Deregulating the financial market so soon after regulating it would have been a challenge to pass with debate, even for a Wall Street government.
So what do they do? They put it in a must pass bill, act outraged when its reported to the public, and then pass it, clearing the way for future deregulation and repeating history yet again. Oh the futility of it all.
Who cares about history when there is money to be made?
Thomas Piketty’s recent book, Capital In The Twenty-first Century, has reported the effects of government policy on wealth inequality and economic stability over the past century with hard data. While the two World Wars played an important role in lessening wealth inequality in Europe, government policies and economic growth seem to be the main causes of a flourishing middle class and a more stable economy. Today, after forty years of deregulation and tax slashing, American inequality resembles what it was at the onset of the Great Depression. It is hard to look past another similarity between the two times, which is the great economic crashes followed by years of instability, high unemployment, and slow growth.
What made the Great Recession less painful than the Great Depression is that our government intervened right away, and the Federal Reserve overflowed our economy with credit, after looking back at history and realizing the mistakes of our ancestors.
While this time we jumped right in to prevent a massive depression, the aftermath was quite different. In the 1930’s, as we saw earlier, our leaders realized the major systemic problems of Capitalism, and pushed forward aggressive regulatory policies to make sure that future generations could avoid the severe pain they had been subjected to. They looked at the historical realities and chose to act, to reform, to better society.
The opposite seems to be occurring today. Six years after the stock market crash of 1929, FDR signed the landmark Banking Act of 1935 into law. Six years after our financial crash, we have already started the deregulatory process. When the FDIC was made into a permanent institution in 1935, I doubt FDR would have approved insuring speculative bets on the complicated derivatives of today. The sort of derivative trading that cost J.P Morgan Chase billions of dollars in losses just two years ago.
But hey, that was then and this is now. Jamie Dimon surely prefers using FDIC insured deposits on complex high risk-high reward derivatives than uninsured funds, just in case.
One thing that recent history shows us is that there is a lot of money to be made at the expense of others. Massive fraud, according to American prosecutors, is not worth punishing with anything other than a fine. So what is preventing these financial alchemists from squeezing out billions of dollars of quick profit while the economy expands into another bubble of toxic securities and irrational bets? Regulations? Fear of being prosecuted? Fear of not being bailed out? No. No. No.
History seems to have lost its importance in contemporary politics. Because to the Wall Street lobbyists and politicians, when there is money to be made, history can take a fucking hike.
