References:
(1) "Inside Job," documentary.
(2) "All the Devils are Here," book.
It was the conservative idea of laissez-faire capitalism that ultimately caused the financial meltdown that has ruined many American lives; current and future lives. The dictionary defines laissez-faire as “a policy or attitude of letting things take their own course, without interfering,” especially in economical matters. Alan Greenspan was the the most important person and chief advocate of economic laissez-faire in the government from 1987 to 2007 as the Chairman of the Federal Reserve, the Central Bank of the United States. He told Congress every chance he got to “deregulate.” He said banks could “regulate themselves. They didn't need government to regulate them.” And, if Congress didn't deregulate, he did it from his seat at The Fed and through his influence at the U. S. Treasury. Deregulation is a big deal for libertarians like Greenspan, and Republicans, not only in finance, but in all of industry.
Deregulation began in earnest in the early 1980s. Wall Street finally had a sympathetic president, Ronald Reagan, in the White House. Donald Regan, a Merrill Lynch chairman and CEO, became Secretary of Treasury in 1981. Regan said, “Wall Street is in full agreement with this President.” On Wall Street, new financial tools were invented; the derivative, based on mathematical equations concocted by physicists. A new job title was invented; the Financial Engineer. Regulators turned their backs on bank mergers that conflicted with the Glass-Steagall Act and God said, “it is good.” The people became convinced. Alan Greenspan, who worked for Charles Keating at the time, became a White House regular adviser. Deregulation first effected Savings & Loan pseudo-banks, and greed took over. Charles Keating went to jail for Savings & Loan fraud. The “Keating Five,” Senators Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John McCain (R-AZ), John Glenn (D-OH) and Donald Riegle (D-MI), were charged with ethic violations and investigated. Only John McCain managed to keep his job. Neil Bush, son of the Vice-President G. H. W. Bush, was on the board of the Silverado Savings & Loan and it cost U.S. Taxpayers $1.3 Billion to save its customers. Neil Bush wiggled out of the fraud charges against him and was only slapped on the wrist by the Office of Thrift Supervision for “breaches of...fiduciary duties involving multiple conflicts of interest.” Then, people forgot, history was changed, and everyone said “this too, will pass.” And, it did. Alan Greenspan was appointed Chairman, Federal Reserve. He became God.
In the early 1990s, as derivatives such as the Collateral Debt Obligation (CDO) and Credit Default Swaps began to be used more and more, and banks began to merge into global "too big to fail" banks with overseas locations, Greenspan turned his eyes away from the risky loans banks began making as much as he could. His Fed position really required him, by law, to oversee banks to a certain degree and to make sure that the banks had enough cash (capital) on hand for the loans they were making. He was certainly supposed to intervene if banks began lending too much to borrowers who had poor credit ratings, the sub-prime market. But, he turned his back on the problem so that banks didn't have to worry about violating the Glass-Steagall Act that strictly forbid commercial banks from risky “investment” gambling in markets. When banks absolutely couldn't avoid the Glass-Steagall Act, they got around the law by having their overseas branches and subsidiaries handle all derivative transactions. This not only hid the bank's Wall Street activity, it also helped the bank avoid paying corporate taxes.
While deregulation was gradually taking place, either by law or “getting around the law,” another laissez-faire idea was becoming the norm around the world: Privatization . This idea was to privatize government programs under private corporations. A number of countries followed suit by doing both, deregulating and privatizing, including Ireland, Greece, Mexico, New Zealand and Iceland, some with the help of huge loans from big U.S. investment banks such as Goldman Sachs, J. P. Morgan and Merrill Lynch. These banks securitized the loans to countries into bonds and Fitch, Moody's and Standard & Poor's all rated the bonds as AAA, the highest credit rating. And then the investment banks bought Credit Default Swaps, as insurance, to make sure they would get their money back in case any country defaulted on its loan.
Mexico, it turned out, was a bad risk in the 1990s. It wasn't quite the AAA rating everyone thought it was and it nearly defaulted on its sovereign debt. It was the high credit rating that was the primary reason that everyone agreed to the loans in the first place, and the big banks and credit rating companies received huge fees for giving it a high rating. The reason that Mexico went bust, however, was that privatization and deregulation didn't pan out like they thought it would. The Mexican Government had to pay for a program whether it was done by the government or by a corporation. While everyone says that corporations are efficient and governments are not, the truth is that corporations are hugely more expensive than government workers are. And, too, Mexican banks began risky derivative gambling as well. So, in order to save Mexico, the U.S. Government bailed out Mexico with a U.S. Guaranteed loan of $20 Billion in 1994, most of which was funneled back to the investment banks as loan payments. So, Goldman Sachs still got its money.
New Zealand appears to be a different case. It didn't need investment bank loans since it had a surplus and had no outstanding loans when it privatized. It also began deregulating much quicker than the United States did, and New Zealand's newly unregulated banks began taking on the same risky loans that American banks were taking on. Subsequently, New Zealand went into a six-year recession from 1991 through 1998 due to its liberalization of corporate regulations and privatization, and with the following 2008 global recession, it has one of the weakest economies in the world. Its businesses are still unregulated and it is becoming a poorer country as each year passes.
Other countries began to fail in the 1990s too, primarily because they adopted the American Capitalistic model; the laissez-faire privatization and deregulation. Mexico first, then came Russia, Asia, Latin America, Egypt, South Africa, the Ukraine, and others all in a short span of time. In all of those cases, three men led the battle to keep deregulation and privatization going; Alan Greenspan, Robert Rubin and Larry Summers. Rubin was the Secretary of Treasury under President Clinton at the time and Larry Summers was his deputy. These three men were called “ The Committee to Save the World.” The same committee had to save the United States' economy from a super-large hedge fund collapse in 1998 when the high-flying Long-Term Capital Management hedge fund collapsed. It was heavily invested in derivatives.
Only one person in the Clinton Administration dared to challenge the three saviors, Brooksley Born. Clinton appointed her as the Commodity Futures Trading Commission Chairman from 1996 to 1999. Until then, Republican Senator Phil Gramm of Texas had prevented any regulation of derivatives by getting a law passed. But, Born saw that the law was limited only to certain derivatives, not to the stuff the banks were creating, so she attempted to regulate them, which would have put a damper on sub-prime lending and securitization of mortgages which, in turn, would have prevented the 2008 recession. But, the big banks and The Committee to Save the World went ballistic. They wouldn't hear of it and they attacked her with anger and ridicule and everything else they could think of. She lost the battle and the war in front of Congress when Republicans led by Senator Phil Gramm joined the three attacking her. Gramm eventually got the Glass-Steagall Act repealed in 1999; the final straw in deregulating the banks. After the meltdown, Brooksley Born testified to the Financial Crisis Inquiry Commission on April 7, 2010, on Alan Greenspan's policies. She gave him “ What for,” calling him a “failure.” But, it was much too late and even then Greenspan wouldn't admit his failures. He said he only failed “30% of the time.” It was a huge thirty percent!
To Greenspan, laissez-faire is a religion and he adheres to his cult-like belief to the end. For Rubin and Summers it appears to be a matter of pride of association; they saw themselves as smarter than everyone else simply because they hung around with people like Greenspan and they were connected to some of the most powerful bankers in the world. They had also held very high positions in the banking industry. It was all an old boys club, and they all considered themselves smarter than everyone else. As for the big bankers, they laughed all the way to the bank at Greenspan. While he preached ideology, they took the money.
In 2001 sub-prime mortgages caused a smaller meltdown, named “sub-prime one,” that got the attention of a number of states and cities and their state and city attorneys. By that time, Washington D. C. couldn't do anything about the banks since the Bush Administration had taken over. The only people who cared in Washington were Senator Paul Sarbanes and Sheila Bair, a Treasury under-secretary, and neither of them had enough power to do anything. Cleveland, Ohio attempted to stop predatory lending by outlawing adjustable-rate and balloon payment loans and mandating counseling for borrowers. But, Countrywide, Ameriquest, Citibank, J. P. Morgan and other banks lobbied the Ohio legislature to overrule Cleveland's city council with a weak state law.
A number of other states and cities were also trying to control and stop predatory lending and all passed consumer protection laws. Eliot Spitzer, New York's Attorney General, tried to take on Wall Street directly, but he was spurned at every turn and banks refused to respond to his subpoenas for data, and the government backed the banks, saying that the banks didn't have to answer Spitzer's subpoenas. It was Georgia's consumer protection laws that finally got the Federal Government involved again. But the Government, led by Greenspan, Rubin and Summers protected the banks, not the consumers. Under the Bush Administration, the Office of the Controller of the Currency (OCC) and the Office of the Thrift Commission (OTS) were the primary Bush bank regulators who took up the issue. They came out with regulations that said no state or city had jurisdiction over nationally registered banks, which caused all companies giving mortgages to sub-prime lenders to register as nationally registered banks. This was called the “Preemption” regulation and it allowed banks to do anything they wanted to and states and cities couldn't interfere. They preempted state and local laws to make their money, the laissez-faire banking attack.
Then, maybe one of the screwiest things happened. OCC and OTS began competing for banks to regulate. Banks were actually given a “choice” on which agency they wanted to regulate them. They “advertized for banks.” So, in effect, the OCC and OTS relaxed regulations even more too attract more banks, they became “buddies” with the banks, told Congress about their increased workloads and Congress gave them more money and people to regulate their list of banks. In effect, it doubled the size of the two agencies regulating banks and each were doing the same tasks. Instead of smaller government, the Republicans doubled it.
In 2000, Iceland had one of the highest standard of living in the world. It had one of the most pristine environments and beautiful landscapes. It got 100% of its power from renewable natural geothermal sources. It did not use coal, oil or nuclear power. Its environment was clean and pure. It had zero poverty. In 2001, Iceland began the purest experiment in American Capitalism. It privatized its three banks and deregulated all in one sweep of its banking laws. The banks began loaning money. Construction companies began ripping up the landscape for power oil and coal power plants. Polluting belching factories moved in. And so, by 2008 when the recession hit, the three banks owed over $100 Billion, over 7.5 times Iceland's Gross Domestic Product of $13 Billion and 11 times its government revenue from taxes. There was no way for Iceland to save its people from poverty. Iceland's populace were furious. They refused to bail out its banks and, instead, forced all of those who got it into debt to pay off the debt. By December 2010, Iceland's recession was finally said to be over. It was pulling itself out of the recession. Iceland is going back to its more socialist ways, and like Denmark and Sweden, its standard of living is coming back again. Iceland's banks were not "too big to fail," and I wonder whether that "too big to fail" idea wasn't just one more laissez-faire scam sold to us.
It seems to me that deregulation always seems to result in “meltdowns.” Today we have another type of meltdown; a nuclear power plant in Japan. And, while the power plant is melting down, our Republican House of Representatives are busy passing deregulating laws; such as the one that prevents the Environmental Protection Agency to control “green-house gases.” In fact, the House has passed a number of bills in the past week to prevent the EPA from doing a number of things that protect the environment, including regulating nuclear power plants.
Japan probably has the strictest nuclear power plant regulations on Earth, since it has more experience with the effects of nuclear radiation of any country on Earth. Yet, there is panic all around from the power plant meltdown. It is ironic that the Republican Party's voice, Fox News, and specifically Glenn Beck, are causing more panic than they are soothing people's nerves about the plant meltdown. But, that may be a Republican strategy too; to keep the population in a panic and therefore ignorant of the truth, and their eyes misdirected away from what's going on in Congress. It's just another diversion.
Someone should go to jail for meltdowns.
Dave
