Obama Administration Determined to Usher in New Great Depression

Paul Volcker must feel like he's going crazy. The former Federal Reserve chairman, current chairman of the newly formed Economic Recovery Advisory Board, and the man Austan D. Goolsbee, counselor to President Obama, calls a "giant," "genius," and "great human being," can't get any respect these days.

You see, Volcker has been hounding the Obama White House to prohibit the nation's banks from owning and trading risky securities, the practice that got the "too big to fail" crew intro big trouble in 2008.

The administration is saying no.

Whatever one thinks of Volcker, any amateur historian can see that he's right to want to keep investment banking separate from commercial banking. This was the basic reasoning behind the Glass-Steagall Act of 1933 that mandated the separation of the two types of banking in order to protect the country from risky investments and speculation. This worked splendidly for six decades until 1999 when the Republicans spearheaded the Gramm-Leach-Bliley Act, which was signed into law by former President Clinton.

Totally unsurprisingly, without regulation and the Glass-Steagall wall, a series of financial bubbles began to grow, and repeatedly burst, fattening the wallets of a select few while taxpayers continually bailed out a broken system.

Now, another Democratic leader, President Obama, seems determined to continue the New Deal reversal. What's the reasoning here? The New York Times cites anonymous officials who describe Volcker as an adviser perceived as "standing apart from Wall Street, and critical of its ways," while Treasury Secretary Timothy F. Geithner, and Lawrence H. Summers, chief of the National Economic Council, are seen, "rightly or wrongly, as more sympathetic to the concerns of investment bankers."

Let me clarify some confusion for the Times. This is a "wrongly" philosophy. It's very wrongly. It's so wrongly that it's the exact behavior of deregulation and cronyism that led to the 2008 economic catastrophe, and before that, the dot-com bubble burst, and before that, the savings and loan debacle, along with a myriad of other so-called "unforeseeable freak events of the stock market."

Lawrence Summers knows this is true. He even said it in a very comprehensive speech where he explained that there has been an economic crisis, on average, every three years. That's an outrageous failure rate, and it indicates the need for dramatic reform, Summers argues. Of course, he doesn't go one step further and indict his investment banker buddies as guilty parties in the larger "reform plan."

No need to step on any toes, right, Larry? As if the man who accepted payments for speaking appearances from financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch (with fees ranging from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs) is going to lead the charge to regulate the banking industry.

Summers and Geithner's various connections to the banking industry have been well documented, but what's outrageous is that they are now shooting down Paul Volcker's correct assessment that only a new Glass-Steagall will prevent future economic catastrophe.

Summers and Geithner are so clearly wrong for so clearly the "wrongly" reasons that it's really shocking anyone is taking these two seriously. At least we can take comfort in the knowledge that when the next economic crisis hits in three years (according to Summers' calculations,) our excellent media will hold the economic gurus' feet to the fire. ...Right?

Crossposted from Allison Kilkenny's blog. Also available on Facebook and Twitter.

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Comments

[seawolf77]

To blame Obama for this is like blaming the unsinkable Molly Brown for the Titanic.

[rmonroe]

I voted for Obama, and I think there is no reason he can't do what Volcker is asking. We need to create laws and regulations to make sure this never happens again. That is what Obama has promised, that is what I want to see delivered. I really didn't think Obama was just you typical politician saying anything to get elected, but it is starting to look like this may be the case. I understand he needs to make some compromises, but this should not be one of them. He needs to make sure that taxpayers money gets payed back, and the banks and wall street do not pull the same crap again.

[FogBelter]

Allison, the figure that people need to repeat to themselves, over and over again is 500 Trillion dollars ...

That is the size of the derivative bubble an unregulated Wall Street was able to whip up ...

500 Trillion Dollars.

The US Treasury will not be able to cover the losses when that bubble goes. The wisest approach for the US Government to take and the one most in line with the National Security interests of the United States is to reinstate the Glass-Steagall firewall between Commercial Banks, Investment Banks, and Insurance Companies. Nationalize the Commercial Banks, and fortify them with the backing of the US Treasury and Fed. And let the Investment Banks and their Co-conspirator Insurance Companies fail as they should.

The President has to understand that his primary responsibility is to protect the Republic, not exhaust the financial resources of the United States in a hopeless attempt to cover loses of institutions and individuals that risked it all on Securities Kiting in support of the greatest Ponzi Scheme in human History.

500 Trillion Dollars .... (actually more but I don't want to scare anybody)

[Guitarsandmore]

It was unregulated free market capitalism that put us into the Great Depression in 1929. FDR and the laws of the NEW DEAL ,plus the spending on WWII, plus the high tax rates on the wealthy, brought us out of the great depression.

Wall Street always wants to be unregulated so they can do just as they please with our money. It is time to cut them off.

Why should the government be a nanny for the spoiled rich babies on wall street? Reagan thought it was the welfare fraud sucking the economy dry but no, its Wall Street. Cut them off I say.

[Indon]

But does Obama, as merely our President, really have the power to prevent the next economic collapse?

I mean, look at the healthcare thing - as it turns out, Obama can't do much but function as a cheerleader while massive corporations buy out politicians to ensure the system will never be fixed.

And I can only imagine the financial sector of our economy, combined with all the fabulously wealthy people profiting from investing through that sector, have immeasurably more power over our lawmakers than a few insurance companies.

[kozy]

Excellent post. Paul Volcker is a very capable economist and former Fed Reserve Chairman that brought the country out of the hyper-inflation 70's to a sane inflation level followed later by solid economic growth. In doing this he endured the screams of the same Wall Street parasites and threats of impeachment from financial nutcases. The Glass-Steagall law should of course be reinstated. Most important, common sense and sense of fair competition in the marketplace should be restored. Volcker is the only one that has the right combination of smarts.

[satyriasis]

Paul Volcker is a great man. He is a lifelong Democrat and civil servant. He was first appointed to lead the Fed by Jimmy Carter and was the driving force that slayed stagflation. Despite the enormous political and business opposition to his hard line approach which saw interests rates go near 20 percent, he stuck by his guns. He was right then by taking risks he did, and he is right now.

Please listen to Volcker. He may not be great but he was far better than Greenscam, or dough boy Summers, or Tiny Timmy G.

[DuganS1]

"JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch"

Goldman, Lehman, and Merrill were not commercial banks leading up to the crisis. JP Morgan was probably in the strongest positions of all the major banks and not a threat to bring down the system. AIG was the biggest threat of all to the system, but they again were not a commercial bank - they were and are an insurance company. Citibank has been a major problem, however, and remains so today. Bank of America is mostly in trouble because they took over Merrill Lynch.

[satyriasis]

Those investment banks you mentioned did get into the business of traditional commercial banks, like mortgages. They brought their high risk mentality into a safe and conservative business.

Glass Stegall enacted a barrier between not just investment and commercial banks but also insurance companies. When they began to entangle with one another is when things got crazy. Each business in fundamentally different despite all being related to finance.

[DuganS1]

The investment banks didn't give mortgage loans. They just bought the loans from the commercial banks that did. Goldman didn't even buy many. Bear Stearns should be on that list instead of Goldman. As for JP Morgan, their involvement in both investment banking and commercial banking didn't contribute to the crisis as far as I can tell. AIG wasn't involved in either investment banking or commercial banking to any extent that contributed to the crisis. It was their credit default swaps, a form of insurance, that did. And how companies like Wachovia (mostly from GoldenWest purchase), NewCentury, Corus Bank, Ameriprise, Indibank, FAnnie Mae, Freddie Mac, and Countrywide contributed substantially to the crisis, but none as far as I can tell wereeffected at all by Glass-Stegall.