Blame Game Serves No One in This Crisis

The News & Advance
Published: September 29, 2008

During the past couple of weeks, it’s been both funny and sad, simultaneously enlightening and infuriating as Republicans, Democrats and their various lackeys in talking-head land on cable news networks have tried to place blame for the Wall Street crisis gripping Washington and New York.

The most obvious target for the blame-slingers has been the administration of President Bush. After all, it was on his watch that the house of cards much of Wall Street was built on collapsed. As the commander in chief, the buck — literally — stops on his Oval Office desk.

But absolutely no one is blame-free in this crisis. No one.

The president belongs in the camp that believes the market functions best when it’s left relatively unfettered by the hand of government regulation. After government control of the national economy reached its zenith in the 1970s with the Nixon administration’s wage and price controls and reams of regulations imposed by Democratic Congresses, the pendulum swung in the direction of deregulation with Ronald Reagan’s election in 1980. The financial markets, which had been moribund throughout much of the previous 30 years, began their upward climb as more Americans had the wherewithal to invest for themselves in what had been the domain of the wealthy.

But the big financial scandal of the 1980s — the savings and loan crisis — should have served as a warning sign to policymakers and politicians. S&Ls, freed of virtually all regulations restricting the type of investments they could make, went on foolish spending sprees and had to be bailed out by taxpayers, to the tune of more than $500 billion.

Apparently no one learned a thing from that crisis, as the banking industry stepped up its lobbying efforts to wriggle out from under the government’s regulatory thumb.

Republicans took control of Congress in the 1994 elections and put their deregulation campaign into high gear. Since the Great Depression of the 1930s, federal regulations had erected barriers between different types of financial institutions. Commercial banks — those accepting individuals’ deposits and making the standard loans on Main Street — came under strict oversight from the Federal Reserve and the Office of the Comptroller of the Currency. The wanted out, and they got it.

In 1999, after a half decade of intense lobbying, the financial services industry got what it wanted: the elimination of the last of the major regulations affecting the sector. Republican and Democrats joined hand-in-hand to repeal the Bank Act of 1933 (a.k.a. Glass-Steagall Act) by margins of 90-8-1 in the U.S. Senate and 362-57-15 in the House of Representatives; former President Bill Clinton signed the legislation in 1999.

At the same time Democrats were letting Republicans have their deregulation of the banking industry, they were busy protecting two of their pet institutions, Fannie Mae and Freddie Mac. The two quasi-public companies — known as government-sponsored enterprises (GSEs) — buy mortgages on the secondary markets from the originating institutions to allow continued liquidity.

Congressional Democrats pushed for two GSEs to purchase more and more mortgages, of increasingly dubious quality, in pursuit of “affordable housing for all” while refusing calls for reform of the two housing giants.

And who did those calls for reform come from? President Bush. Early in his administration, the president and his economic advisers warned the two companies were under-capitalized and posed a risk to the entire financial system, but no one was listening.

Democrats like Sen. Christopher Dodd and Rep Barney Frank and their allies accused the administration of being against “affordable housing,” which turned out to be anything but affordable.

Now, all Americans are are on the hook for the cost of yet another cleanup.