Thursday, January 31, 2008

What hath deregulation wrought?

When both CounterPunch and the New Yorker provide essentially the same information, I know to pay attention.

First I read "An Inverted Pyramid of Subprime Slop - The Great Credit Unwind of 2008," Posted on January 29th at CounterPunch. This is a rather alarming article, and its author, Mike Whitney, points the finger at former President Bill Clinton for creating the situation that has exacerbated the slide of the US economy into a recession that even a $156 billion stimulus package can’t fix.

What did Clinton do? “The US' current account deficit (nearly $800 billion) has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, 'structured finance.'

“Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of ‘protection’ (of deposits) to ‘risk taking’, which is the securities business. Through ‘financial innovation’ the investment banks created myriad structured debt instruments which they sold through their Enron-like ‘off balance’ sheets operations (SIVs and Conduits) Now, trillions of dollars of these subprime and mortgage-backed bonds---many of which were rated triple A---are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade.”

There’s more to this article about bond insurers going belly-up. If you read the whole article, you may not get a good night’s sleep.

When my February 4th New Yorker came, I thumbed my way through it to “The Talk of the Town,” and found "The Minsky Moment," by John Cassidy: “Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.”

Read on. Cassidy points the finger at Alan Greenspan and Robert Rubin for the current credit crisis and likelihood we’ll have a recession: “Since the nineteen-eighties, Congress and the executive branch have been conspiring to weaken federal supervision of Wall Street. Perhaps the most fateful step came when, during the Clinton Administration, Greenspan and Robert Rubin, then the Treasury Secretary, championed the abolition of the Glass-Steagall Act of 1933, which was meant to prevent a recurrence of the rampant speculation that preceded the Depression.”

(photo of Clinton signing the bill repealing the Glass-Steagall Act -


Dan Gurney, Mr. Kindergarten said...

Was it Mr. Greenspan who said that Bill Clinton was the best Republican president we've had in quite a while?

Bill "reformed" the welfare system that Nixon had expanded in the early seventies; Bill got GHWB's GATT and NAFTA legislation through Washington, and he repealed Glass-Steagall. He balance the budget. Clinton governed like a Rockefeller Republican.

Based on Clinton's record, it seemed to me, in 2000, that Democrats succeeded in getting Republican's work done. And conversely, Republicans did the work of Democrats. (Nixon ending the illegal war in Vietnam, talking to China and slowing us to 55; Reagan making friends with the USSR).

The Cheney/Bush regime put that theory to rest! Whose work are they doing??

Thanks for the post, Gail. I need my sleep tonight, so I think I'll skip the whole article.

Anonymous said...

Possibly even more alarming is the analysis advanced by Eric Janszen "Priming the Markets for Tomorrow's Big Crash" in the February Harper's.

His thesis is that the economy is dependent on bubbles -- i.e., the dot-com bubble of the 90's and the real estate bubble that is crashing now.

He forecasts the next bubble will be in the fields of alternative energy and infrastructure.


Gail Jonas said...

Anonymous (last commenter), I also read Janszen's article and passed it on to my son who as a solar energy business,

What was dismaying to him (and me) is that it appears that we now need bubbles to keep our economy afloat. And bubbles always pop.