In 1933, as a result of the Great Depression blamed on rampant unregulated banking practices, Congress enacted the Glass-Steagall Act. Designed to curb the abuses that have led to the catastrophic financial failures witnessed these last few days the Glass-Steagall Act was criticized for decades and eventually determined to be too ‘pre Reaganomics’ and was formally overturned in 1999 when President Clinton signed into law the Gramm-Leach-Bliley Act.
Deregulation, getting the government out of the way of free market capitalism, would be good for the economy. Phil Gramm, the father of deregulation and expected to become Treasury Secretary if McCain is elected president is the foremost enabler of US credit addiction.
Sketchy details of the $700B bank bailout were reluctantly released over the weekend and in a nutshell our Congress is proposing to nationalize bad debt and privatize profit. How does the cash strapped government intend to pay for this bailout? Apparently with credit as the proposal seeks an increase in the limit on the national debt from $10.6 trillion to $11.3 trillion.
The government will spend $281 billion servicing the national debt this year. The country’s national debt service totals nearly 10% of the annual fiscal budget and is expected to exceed combined spending for the Pentagon, Social Security, Medicare and unemployment in three or four years.
John “basically I’m a deregulator” McCain now blames the fallout on, “a failure of regulatory agencies.” Meanwhile President Bush also faults regulators and is now calling for swift action without safety provisions, i.e. regulations, to the bailout plan. “This action does entail risk. But we expect that this money will eventually be paid back. … The risk of not acting would be far higher.”
To quote Shakespeare, “That is hot ice and wondrous strange snow. How shall we find the concord of this discord?”
Representative Peter DeFazio (D-OR) argues the plan will benefit the same executives that caused the failure in the first place. He noted the $700B plan to rescue the economy from the worst financial disaster in US history consists of a scant three pages costing “a billion dollars a word”.
President Bush commented recently that we just built too many houses, a simple explanation to a very complex problem. Deregulation and federally backed loans made it profitable for executives to take excessive risks in favor of short-term profits. How will Congress respond?
“My great-grandchildren will be saddled with the estimated $1 trillion debt left in the wake of this proposal,” said Senator Jim Bunning (D-KY). “We have gotten to this point because nobody has been minding the store. Both Secretary Paulson and Chairman Bernanke should be held accountable for their inaction. And now because of that inaction, the American taxpayer is left with the bill.”
While I agree with Bunning’s sentiments, Congress can hardly feign ignorance or claim no responsibility in these events. Last July Ralph Nader sent a letter to Congress alerting them the bank insurance fund may be inadequate to handle the developing bank industry crisis. Financial columnists around the world have been warning of the very events that have occurred and are filling publications with links to their early predictions.
Congress is likely to cave and stick the largesse of corporate failure to the average taxpayer unless creditor nations like China and now Japan decide our credit isn’t any good anymore. Everyone has been asleep on the job but this bail out, if it passes is going to give the cat its mouse and eat it too.