What Happened to the Regulators?
By James F. Cotter
Former Senator Phil Gramm of Texas, ten years ago, authored what became known as the Gramm-Leach-Bliley Act. Passed in 1999, the act repealed the Glass-Steagall Act of 1933, which had separated commercial and investment banking. David Leonhardt wrote in the New York Times, “The point of Gramm-Leach-Bliley was to tear down the wall, built by Glass-Steagall, separating banks that did risky investing from those that did basic lending. (The mingling of those two helped create a cascade of bank failures during the Depression.)” (1)
One of the few dissenters at the time (the bill passed 90-8) was Senator Byron Dorgan of North Dakota, who said, “I firmly believe…that we are with this piece of legislation moving towards greater risk, we are almost certainly moving towards substantial new mergers and concentration in the financial services industry. That is almost certainly not in the interest of consumers." (2)
He also said, “I think we will look back in ten years’ time and say we should not have done this, but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010.” (3)
One of Gramm-Leach-Bliley’s effects was to make regulation more difficult. A number of economists, including the Nobel Prize winner Joseph Stiglitz, have blamed the current financial crisis, at least in part, on that bill. (4)
Paul Krugman, another Nobel Prize-winning economist, suggested last year that if McCain won the election and appointed Phil Gramm Treasury Secretary, “We could manage to have another Great Depression if we work at it hard enough. I think Phil Gramm might be just the guy to do it.” (5)
Another piece of legislation that helped pave the way for our current financial mess is the Commodity Futures Modernization Act of 2000. Rachel Maddow offers a cogent if slightly awkward summary: “That one said that certain things that financial companies do to spread their risk around, to keep their balance sheets looking good even when they’re making hugely risky deals. These are things like credit default swaps and collateralized debt obligations….This legislation decided that those things, those risk-hiding things would be completely exempt from regulation. Completely exempt. They would not be regulated.” (6)
Senator Dorgan was quite right. A return to regulation is essential to free this nation from its financial doldrums and keep it economically secure. There is no sense in repeating proven follies time and time again. As Einstein said, that is the definition of insanity.
REFERENCES
(1) http://www.nytimes.com/2008/09/28/magazine/28wwln-reconsider.html?ex=1380340800&en=2a5ebdc024e799bc&ei=5124&partner=permalink&exprod=permalink
(2) http://www.salon.com/tech/htww/2008/10/02/_byron_dorgan_and_risk/index.html
(3) http://www.nytimes.com/2008/09/28/magazine/28wwln-reconsider.html?ex=1380340800&en=2a5ebdc024e799bc&ei=5124&partner=permalink&exprod=permalink
(4) http://wonkroom.thinkprogress.org/2008/09/20/economists-blame-gramm/
(5) http://thinkprogress.org/2008/09/16/krugman-on-gramm/
(6) http://videocafe.crooksandliars.com/heather/rachel-maddow-show-deregulation-dummies
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