ZING!  I love it when he does the “Come on!”  It just screams “this is absurd.”  And it is.  It’s absolutely absurd for John McCain to even be talking about this with outrage, because the same guy that wrote McCain’s economic policy (who has since quit being an official “advisor” after he called us all “whiners”) was a principle engineer of this entire mess: Phil Gramm.  Phil Gramm is a former Senator from Texas, former chairman of the Senate Banking Committee, and one of the principle writers of the Gramm-Leach-Bliley Act.  This act fully repealed the then-already-slightly-repealed Glass-Steagal Act.

The Glass-Steagal Act was part of FDR’s New Deal that reformed the broken banking system in the United States.  The main provisions of the bill were establishing the FDIC and, more importantly to this situation, separated banks into commercial and investment banks, depending on their business, and kept a very firm wall between them.  This was, as economist Robert Kuttner explains, due to some eerily familiar behavior that occurred in the 1920′s:

The Glass-Steagall wall was devised to prevent a repeat of the 1920s’ scams, in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank. With Glass-Steagall, commercial banks were tightly supervised and given access to federal deposit insurance, to keep savings secure and prevent runs on banks. Investment banks, meanwhile, were not government-guaranteed and were free to do more speculative transactions for consenting adult customers. But Roosevelt’s newly created SEC subjected securities markets to much tighter structures against self-dealing and insider conflicts of interest.

This is exactly what happened now.  Banks made risky sub-prime loans to untrustworthy customers, bundled the mortgages together into securities, and sold them off to investors (typically hedge funds and investment banks who purchased them using leveraging at absurd ratios).  The housing bubble burst, home prices fell, people couldn’t pay their loans, forclosures skyrocketed, these sub-prime securities became worthless paper, and Wall Street began to fall.

We started this mess with 5 major financial banks.  Now there’s 2.  And not only did the federal government have to re-acquire Fannie Mae and Freddie Mac, but the Fed now owns an insurance company, AIG, thanks to the magic of credit default swaps.  CDS’s are basically insurance for bond holders to protect them from default.  You pay the insurer a fee over time and if the bond defaults, the insurer covers the bond.  If the bond does not default, the insurer makes a premium without really investing anything.  This is an example of the many derivatives you can find on Wall Street these days, which Kuttner calls “dubious financial instruments.”

So there you have it; just you’re average risky-mortgage-loans-turned-banking-crisis-turned-investment-bank-collapse.  And how did we get here?  The Gramm-Leach-Bliley Act and the repeal of the Glass-Steagal Act, authored in large part by Phil Gramm, (former) senior economics adviser to John McCain.  Here’s what Gramm said after the bill passed, in 1999:

The world changes, and Congress and the laws have to change with it.  Abraham Lincoln used to like to use the analogy that old and outmoded laws need to be changed because it made about as much sense to continue to impose them on people as it did to ask a man to wear the same clothes he did when he was a child.  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. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality.

I think we’ve learned something quite to the contrary, Mr. Gramm.  Quite.

And as for John McCain?  Well, he thinks we should probably just launch an investigation:

And we’re going to fix and make sure that every American who has a deposit in a bank, that their deposit is ensured. We’re going to need a 9/11 commission to find out what happened and what needs to be fixed. I warned two years ago that this situation was deteriorating and unacceptable. And the old-boy network and the corruption in Washington is directly involved, and one of the causes of this financial crisis that we’re in today. And I know how to fix it, and I know how to get things done.

Know how to get things done?  What kind of things, John?  What’s your general philosophy on all this?  Do you agree with your pal Phil Gramm?

I am fundamentally a deregulator.

Thought so, John.  Thought so.  Sounds like just what we need right now.  Maybe you can have Phil Gramm write the bill, because it worked out so well the last time.

Tags: Barack Obama, economics, John McCain, Phil Gramm

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