What Hath Clinton Wrought?
What can be said in Clinton's favor is that in 1999 few people anticipated the out-of-control growth of the hedge fund industry and the subprime mortgage market. The New York Times described the new financial world created by the repeal of Glass-Steagall in a June 2007 profile of Goldman Sachs:
While Wall Street still mints money advising companies on mergers and taking them public, real money - staggering money - is made trading and investing capital through a global array of mind-bending products and strategies unimaginable a decade ago.
Curiously, Goldman Sachs head Lloyd Blankfein paints the perfect big picture of what has happened:
We've come full circle, because this is exactly what the Rothschilds or J. P. Morgan, the banker were doing in their heyday. What caused an aberration was the Glass Steagall Act.
Blankfein's analysis testifies to the full impact of Bill Clinton's actions, for like many members of the Counterrevolution he sees the New Deal as an aberration and longs for a return to the days J. P. Morgan and other tycoons gave the Gilded Age its nickname. His "aberration" was eliminated not because of the actions of some radical Republican, but because of Bill Clinton. No wonder Goldman Sachs is also a prime contributor to you-know-who.
As is often the case, the story of the repeal of Glass-Steagall and the growth of the subprime mortgage market that is now crumbling around us like a financial house of cards can be best be told by a graph:
If you think of this graph as the level playing field, notice how flat it was before Bill Clinton repealed Glass-Steagall, then notice how steep it has become. Those subprime loans amount to nothing more than an organized ripoff of millions of innocent Americans, with the steepness of the graph illustrating the how far the playing field has tilted.
The result is that all of a sudden people are thinking Glass-Steagall wasn't such a bad idea after all. Robert Kuttner testified before Barney Frank's Committee on Banking and Financial Services in October, evoking the dreaded specter of the Great Depression:
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s - lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas.
Then there is Dow Jones MarketWatch's Kostigen:
I'm not saying that Glass-Steagall would have made a difference to the evolution of the collateralized debt obligations. But it might have helped identify and isolated the damage.
As Congress continues to investigate the mortgage crisis, more people are wondering whether the repeal of Glass-Steagall was a mistake.
The Future of Your Mortgage
In testimony before Congress on November 8, Federal Reserve Chair Ben Bernanke painted a grim picture of the current crisis and even grimmer picture of the future:
On average from now until the end of next year, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first interest rate reset.
According to a December 2006 study by the Center for Responsible Lending, a nonpartisan research and policy organization:
More than 2 million people with subprime loans are facing foreclosure this year and nearly 20 percent of subprime mortgages issued between 2005 and 2006 are projected to fail.
But numbers and testimony and even history mean little to those who suddenly find themselves up against the wall. In every city and town across this country "For Sale" signs are popping up on lawns. Behind each of those signs lies a personal story, a family tragedy, which like the tragedies of the Great Depression, tells of innocent Americans felled by an affliction they never saw coming. Walk any street in this country today--even in affluent neighborhoods--and each time you see one of those signs the hairs on the back of your own neck stand up, because those signs instill the same fear people felt when they walked into a bank in 1932 and found their money gone.
Two million people have found themselves one step away from figuratively being tossed out onto the street, the way millions were in the 1930s. Meanwhile, there are young people starting new lives for whom home ownership is rapidly receding, middle-aged people who finally had scraped together enough for a down payment only to find they can't get a mortgage and older people for whom their home was their retirement and now find its value dropping like George Bush's poll numbers. Finally there are even millions more for whom the collateral damage from the crises promises to cast its shadow over their American Dream.
The International Monetary Fund recently drew the following lessons from various financial crisis:
It is difficult to tell at the time whether a financial crisis will have broader economic consequences
Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis.
Both have characterized what happened after the repeal of Glass-Steagall. It is too bad Bill Clinton did not have their wisdom when he made his decision, but then when you make decisions by triangulating, how much weight do you give such studies?
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