One thing that really ticks me off is hearing liberals blame the Republicans for the economic crash. Of course the GOP played a critical role in making this catastrophe happen, and the party is perpetuating it on Capitol Hill by mindlessly defending the big banks and the financial players, and preventing necessary reforms. I get that. We all do, or should.
Far fewer liberals understand how important the Democratic Party has been and continues to be in enabling and covering for financial elites on the left flank. Some do, but most are fixated on this idea of Republicans as the little cigar-smoking tycoon from Monopoly, and the Democrats as paladins of the little guy, that they miss entirely how the Democrats, who are now trying to figure out how to co-opt the Occupy Wall Street protests the way the GOP co-opted the Tea Party, sold themselves to the financial sector long ago. Frankly, for reasons I get into below, I find it hard to take seriously the oft-heard liberal complaint that working-class and middle-class social conservatives voted against their economic interests in siding with the GOP. Had we voted Democratic, we would have gotten pretty much the same economic policies, as well as all kinds of social liberalism that we dislike. I’m not saying that that fact was top of mind when we voted Republican these past few election cycles — in my case, it wasn’t — but it is, nevertheless, a fact.
For a short but detailed precis of how this happened, check out this report from a consumer watchdog group. It’s not focused solely on the Democrats, but rather on the nexus between Washington and Wall Street since about 1998, and how Washington changed the regulatory climate to permit dangerous practices that brought the economy to the brink of collapse. — and how both parties are about equally to blame. From the years 1998-2008, big banks and financial firms spent billions on lobbying and campaign contributions; they went about equally to Republicans and Democrats, depending on who held the most power at the time. Here are two huge moves pushed by the Clinton Administration, in tandem with Congressional Republicans and Democrats, that paved the way for the disaster:
Repeal of the Glass-Steagall Act and the Rise of the Culture of Recklessness
The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 (also known as the Banking Act of 1933) and related laws, which prohibited commercial banks from offering investment banking and insurance services. In a form of corporate civil disobedience, Citibank and insurance giant Travelers Group merged in 1998 – a move that was illegal at the time, but for which they were given a two-year forbearance – on the assumption that they would be able to force a change in the relevant law at a future date. They did. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that rocked the financial markets in 2008.
The Executive Branch Rejects Financial Derivative Regulation
Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffet’s warning that they represent “weapons of mass financial destruction” has proven prescient.2. Financial derivatives have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. The Commodity Futures Trading Commission (CFTC) has jurisdiction over futures, options and other derivatives connected to commodities. During the Clinton administration, the CFTC sought to exert regulatory control over financial derivatives. The agency was quashed by opposition from Treasury Secretary Robert Rubin and, above all, Fed Chair Alan Greenspan. They challenged the agency’s jurisdictional authority; and insisted that CFTC regulation might imperil existing financial activity that was already at considerable scale (though nowhere near present levels). Then-Deputy Treasury Secretary Lawrence Summers told Congress that CFTC proposals “cast a shadow of regulatory uncertainty over an otherwise thriving market.”
Congress Blocks Financial Derivative Regulation
The deregulation – or non-regulation – of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act (CFMA), passage of which was engineered by then-Senator Phil Gramm, (R-Texas.) The Commodities Futures Modernization Act exempts financial derivatives, including credit default swaps, from regulation and helped create the current financial crisis.
I strongly recommend that you watch the PBS Frontline documentary “The Warning,” which details how the Clinton economic brains Robert Rubin and Larry Summers teamed up with Fed chairman Alan Greenspan to silence and politically discredit Brooksley Born, a semi-obscure government regulator who tried to alert Congress to the systemic danger posed by the unregulated derivatives market. You cannot watch this thing and walk away believing that the crash was solely a Republican-engineered disaster.
There was also the Fannie Mae disaster, brought to us by the Clinton Administration and pressure from the banking industry, which saw a gold mine in government-backed mortgages. From the New York Times in 1999:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans. [Emphases mine — RD]
Notice that this wasn’t only an attempt by the Clinton Administration to do good (increase minority home ownership rates — a cause taken up in 2002 by George W. Bush) and serve a key political constituency (minorities), but also motivated by lobbying from the financial industry. Look, I’m not trying to exonerate Republicans here. In a future post, I’m going to point out in similar detail how the Republican Party has aided and abetted this catastrophe over the same time period. It’s a pretty weak defense, though, to say, “But the Republicans were worse!” It’s probably true, but so what? At least the GOP makes no pretenses about its love affair with Big Business and Finance.
For many liberals, it was no doubt the case that the Democratic Party could do whatever it wanted to with Wall Street so long as it fought to keep abortion legal, and to protect sacred cows of the cultural left from assault by Rednecks and Christianists. How’s that worked out for y’all? (I know, I know, same deal from the Right: many social conservatives — me among them, let me admit — turned a blind eye to the GOP’s sellout to Wall Street because the only thing we were really interested in was the pursuit of socially conservative goals through politics. That has worked out even less well for us than the defense of social liberalism has for liberal voters.)
You know what I would like to see? Our gerrymandered Congressional districts work for real change regarding government’s approach to big finance. Most Congressional districts are fairly safe for one party or the other, thanks to gerrymandering. How about cultural liberals who are fed up with Washington’s collusion with Wall Street launch a primary challenge to the incumbent or whoever the local party machine wishes to run. How about cultural conservatives do the same in reliably red districts. Give voters on the left and the right who are heavily influenced by cultural issues an opportunity to vote their consciences on abortion, gay rights, and other cultural issues, while also casting a vote for true Wall Street reform.
In order to get there, grassroots Democrats have to give up this idea that their party, as it currently exists, is some kind of innocent in all this, and is capable of undertaking rigorous reform with the crew it now has. To liberals who criticize working-class and middle-class cultural conservatives like me for voting against our economic interests because of social issues, look back over these deeds of the Democrats from 1998-2008, and tell me exactly how it would have been in our best economic interests to have voted Democratic? Because aside from a few marginal things, I’m not seeing it.