March 28, 2009
The decade of the 1990s was marked by several major reforms in economic policy that balanced the U.S. budget, freed businesses from unnecessary regulatory controls, and gave incentives for welfare recipients to work for a living. These measures made possible a remarkable economic boom that finally came to an abrupt end on September 11, 2001. Some of those policy changes of the 1990s were gravely mistaken, however, and the 1999 repeal of the main provisions in the Glass-Steagall Act of 1933 ranks at the top of that list. This legislative milestone created the Federal Deposit Insurance Corporation (FDIC), guaranteeing bank deposits up to a specified limit, but in exchange, banks were required to divest themselves from investment brokerage services. The widespread practice of mixing commercial and investment banking activities created obvious conflicts of interest, and fraud was one of the main reasons for the financial bubble that burst in October 1929.
A major league hat tip goes out to Waldo Jaquith for digging up a New York Times article from November 1999, when the financial deregulation bill was passed. This passage in particular caught my attention:
Treasury Secretary Lawrence H. Summers said. "This historic legislation will better enable American companies to compete in the new economy."
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system.
Among treasury secretaries, Summers was one of the most intellectually gifted and conscious of the ramifications for the "new economy." In this case, however, he showed bad judgment. (Now that he is a top White House adviser, I hope he has learned his lesson.) I was very dubious about the repeal of Glass-Steagal at the time, and I wish more people had spoken out against it. Famous last words: "What could go wrong?" Well, for one thing, the massive consolidation of the banking industry into giant holding companies with shaky foundations that were invisible to the public eye. CitiGroup is the classic example of why commercial bank lending operations and investment services should be kept totally isolated from each other.
What is the moral of this story? That basing public policy on a dogmatic application of ideological principles is likely to backfire in the end. In this case, the over-zealous pursuit by Republican leaders of deregulation in the financial markets has set the stage for a sharp reversal in policy direction, undermining the foundations of our free enterprise system. It is fitting and proper to criticize Democrats such as Chris Dodd and Barney Frank for their role in pushing lending institutions into making risky loans, but that is only part of the story behind the current crisis. The Republicans who sponsored that legislation -- former Texas Senator Phil Gramm, as well as Representatives Jim Leach (Iowa) and Thomas Bliley (Virginia) -- deserve harsh criticism as well. Senator Byron Dorgan (D-ND) and the other brave souls who dissented at the time should get a round of applause. Only one Republican in the Senate voted "no": Richard Shelby of Alabama.
As the Cherry Blossom Festival gets underway in Washington, it's hard to imagine that the lands occupied today by the Mall and the parks around the Tidal Basin were once putrid, marshy wastelands. The land reclamation project that made Our Nation's Capital the lovely place it is today came about because of wise, visionary leaders such as President Theodore Roosevelt who overcame the objections of short-sighted penny-pinchers. For example, Illinois Congressman Joe Cannon tried for years to block construction of the Lincoln Memorial, and he almost succeeded. His words to Elihu Root in 1902:
So long as I live, I'll never let a memorial to Abraham Lincoln be erected in that goddamned swamp.
Cannon managed to delay the project until after Roosevelt left the White House, but President Taft pushed for the Potomac River site, and Congress finally approved the funding bill as Taft's term was about to expire in 1913.
SOURCE: Washington Post magazine, Feb. 3, 2008
Speaking of "Honest Abe" Lincoln, this year marks the bicentennial of his birth in 1809, and a set of four commemorative stamps in his honor was recently issued by the U.S. Postal Service: