Minority leader Rep. John Boehner seems to think that Americans are blindly stupid. While on CNN with Wolf Blitzer he claimed that there was no deregulation in the financial industry. Here, check it out.
Not only was there deregulation, but it occurred over the better part of 25 years, and is what helped cause our current economic meltdown (a culture of debt and market stupidity also played a role). While there are many cases of deregulation I could cite, here's my top 4 (which I explore in detail in my book).
1. SALOMON'S THREE WISHES, 1980-81: In the early 1980s Salomon Bros. sent their lobbyists to Washington and, along with other lobbyists, were able to get Congress to deregulate the banking and S&L industry so that they could sell mortgages at a loss, which meant that the American taxpayer picked up the tab. This facilitated the growth of mortgage securities, and the rise of collateralized debt obligations (CDOs), which AIG decided they would insure in the late 1990s. The S&Ls also got to use the proceeds to invest in things like ostrich farms and yachts, instead of using their money to fund home purchases.
2. THE FED'S 3-2 DECISION, 1987: With one single 3-2 vote the Federal Reserve said commercial banks could start acting like investment banks. The FED said they could handle municipal bonds and mortgage securities, which they began to compete for vigorously. The two people who voted against this provision included then FED Chair, Paul Volcker, who was concerned that commercial banks would become consumed with securities and lower lending standards in order to gain lucrative underwriting fees. Because commercial banks are FDIC insured Volcker believed banks would eventually get reckless in the securities market. Ooops.
3. THE FINANCIAL SERVICES MODERNIZATION ACT, 1999: With a vibrant market for CDOs and commercial banks already competing for investment bank business, Bill Clinton signed into law the bill that effectively eliminated the Depression Era Glass-Steagall Act. Glass-Steagall for years had kept the American economy from allowing insurance, bond, and commercial banks from mixing together under one roof. Why? Check out 1929. The Financial Services Modernization Act (A.K.A. Gramm-Leach Act) in effect said, "Go ahead, create, buy, and insure what you want".
4. PAULSON & THE SEC, 2004: In 2004, before he became Treasury Secretary, Hank Paulson was CEO of Goldman Sachs. He went in front of the Securities & Exchange Commission (SEC) to ask that the "net capital rule" be suspended. In plain English he argued that the financial industry should be able to borrow at a 30-1 ratio. Not surprisingly, the industry went from leverage ratios of 7-1 to 35-1 almost over night. How big was this? Imagine making $10,000 per year and finding a bank willing to lend you $350,000. Not surprisingly, the financial institutions went nuts borrowing and buying the complex instruments (which AIG insured) that helped sink our economy.
These deregulatory developments reached critical mass under George W. Bush, but were put on steroids with Alan Greenspan's easy money policies. Because borrowing was made easy, it gave the impression that money and wealth were free. In reality, deregulation over a 25 year period helped create a casino mentality, which emphasized wealth extraction rather than wealth creation.
How John Boehner can think otherwise is beyond me. What an idiot.
- Mark
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