Cops and Robber Barons

Rachel Maddow had a great segment tonight (March 20) on the history of deregulation, called “Cops and Robber Barons.” As she points out, there were two critical pieces of legislation that set the current economic disaster in motion: one was the Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999, that essentially repealed the Glass-Steagall Act. The second, less well known, was the “Commodity Futures Modernization Act of 2000,” which is what deregulated Credit Default Swaps, etc. These two acts essentially undid the Legislation passed during the Great Depression to protect us from things like, um, the Great Depression. Both of these were signed by President Clinton!

Rachel described the situation after these bills thusly: Bankers, now free to join up with insurance companies and other financial products companies, were flying in space ships, while the "cops" were only able to pursue them on horseback.

From the Wikipedia article cited above:

The Gramm-Leach-Bliley Act, … is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

Rachel used the example of Citibank merging with Travelers to form Citigroup (maybe she reads the Wikipedia, too?), to illustrate the effects of this act.

The less well known Commodity Futures Modernization Act is described by the Wikipedia as follows:

The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.

This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000; the legislation thus became law as a part of H.R. 4577 – Public Law 106–554, §1(a)(5).

The act has been cited as a public-policy decision significantly contributing to Enron’s bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the bankruptcy filing of Lehman Brothers and emergency Federal Reserve Bank loans to American International Group[1] and to the creation of the U.S. Emergency Economic Stabilization fund.

Rachel did a masterful job of bringing these two pieces of legislation together. They constituted an important 1-2 punch to the economy. To switch metaphors, as Bill Clinton left the presidency, he left the barn door open. During the next 8 years, with the gleeful assistance of the Bushies, all the horses left the barn. So now, when Obama needs horses, there aren’t any left.

Now this is a curious thing. The current economic meltdown seems to have been set in motion by President Clinton. And President Obama’s team is currently populated with how many Clintonista economists?

This is not change that I can believe in.

Bob in HI

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