Paul Volcker, or the "big guy," as President Barack Obama refers to the former Federal Reserve chair who heads his Economic Recovery Advisory Board, nailed it in a series of blistering remarks on the sorry state of our economy. But what he said was even tougher than was indicated by the media's scattergun reporting on his speech last Thursday to the Chicago Fed. Thanks to Reuters, which posted the video coverage online, it is possible to take the full measure of his concern over where we are and how we got here.
Volcker warned that "the financial system is broken. ... We know that parts of it are absolutely broken, like the mortgage market, which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government." That sentence was quoted in brief mentions of the speech in The New York Times and other leading news outlets but not so his explanation of how this was allowed to happen: "I don't think anybody doubts that the underlying problem in the markets is this too-big-to-fail syndrome, bailout and all the rest."
Volcker is right that those too-big-to-fail banks were at the heart of the problem, but the folks who pushed through the legislation allowing the creation of those unwieldy financial monsters still feign innocence. They include Bill Clinton; his treasury secretaries, Robert Rubin and Lawrence Summers; former Sen. Phil Gramm, a Texas Republican; and former Federal Reserve Chair Alan Greenspan. Their success in smashing the wall between investment and commercial banking is the source of our current misery.
As Volcker observed, the investment banks stopped investing in truly productive ventures and turned into "trading machines instead of investment banks," resulting in "encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn't easily be managed by the old supervisory system."
That melding of Wall Street high rollers' risky bets with the federally insured deposits of ordinary folks required the U.S. government to bail out the former to save the latter. That was just what a small band of eight senators predicted when they alone voted against the radical deregulation that Clinton signed into law in 1999. The urgency behind passage of that law was the temporary waiver of the Glass-Steagall Act by the Fed, an action that allowed the merger of the Travelers insurance company and Citibank to form Citigroup, creating the biggest of the too-big-to-fail banks.
That merger was celebrated in an April 8, 1998, New York Times editorial that was all too typical of the response of the big news corporations:
"They have announced a $70 billion merger -- the biggest in history -- that would create the largest financial services company in the world, worth more than $140 billion. If regulators approve the merger, Citigroup, as the company will be called, will serve about 100 million customers in 100 countries. In one stroke, [they] will have temporally demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies."
The same theme of modernization was struck by President Clinton when he signed the law making permanent the temporary exemption for the newly formed Citigroup: "Today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority."
Clinton then handed one of the pens he had used to sign off on the new law to a beaming Sandy Weill, Citigroup's CEO, who had it installed in the hallway of the new company. The trophy was just steps away from the office where Weill installed Rubin, who had left the Clinton Treasury post after the law that cleared the way for Citigroup went into effect. Rubin was at Citigroup for the full crazy ride but insisted in congressional testimony that despite his $15-million-a-year compensation he did not know of the company financial shenanigans he had done so much to make legal.
Citigroup, thus freed from sensible regulation, went on to become a major leader in the securitization of subprime and Alt-A mortgage debt before being put on government life support. It required $45 billion in a taxpayer bailout and Fed backing of $300 billion of Citigroup's toxic assets to stay alive, at less than $4-a-share stock valuation. On Monday, Norway's central bank joined a long list of plaintiffs attempting to hold Citigroup responsible for the toxic debt it had sold. Guess they are not so happy with the destruction of those "unnecessary walls" that Clinton and the editorial writers at The New York Times had so wildly celebrated.
You sound like Cassandra, but keep it up. She was right too.
Here we go again, and this guy Scheer ought to know better. Subprime and Alt-A mortgages aren't failing any faster than any other mortgages--in fact, Jumbo mortgages, the ones for the "rich", are failing faster than any other kind. Scheer--bubala--if you take a mortgage on a house for say 90%, and then the value of the house declines by, say, 25% (and this happened and is happening all over the country), then when the homeowner sells the house, he's going to have to write a check for 15% of the value of the house to pay off the mortgage, PLUS closing costs as high as 8%. So to sell a house you bought for a million for $750,000, you have to write a check out of your own pocket for over $200,000--really!!!
Now, lots of people can't afford $200,000, and even if you can, are you really going to write that check? No, you're going to walk away from the house--thus, foreclose--and this has been playing itself out all over this country--and EVERY borrower is doing this.
The rise and fall in housing prices caused this, NOT Citigroup "securitizing" subprime mortgages. I'm amazing you don't know this obvious fact, Scheer.
Everyone keeps missing what happened. The too-big-to-fail banks, in effect, made bad bets on margin, yes. But why were those bets bad? They were bad because housing prices in the US rose to unsustainable levels during the middle years of the Bush Administration. This nationwide catastrophic pricing increase triggered the nationwide, and the worldwide, decline. It was a massive economic issue--MASSIVE. The total amount of "derivatives" that were created, bought and sold by the "too-big-to-fail" banks--and everything else they did put together--wasn't anything remotely close to the incredible economic effect of the massive house price rise.
The rise caused this because the rise made the fall inevitable.
The Fed is supposed to be the watchdog of this, and if the housing market overheats, they are supposed to cool it off by raising interest rates. They did not, despite many internal warnings (although big shot economists in their theoretical laboratories, like Krugman and Reich, completely missed it). They did not because low interest rates were fueling a phony economic rise and flooding Bush crony pockets with cash.
Bush & Co. threw the American economy under the bus. The "too-big-to-fail" banks just went along fo the ride.
I agree that raising interest rates would have helped but all the other crap that was going on Wall Street and with banking was inexcusable and would have pulled everything down anyway. Total gross negligence.
The problem isn't the size of government. It's the corruption of our government.
I think my head is about to explode.
WTFBBQ
:-]
But, he's not listened to by Obama and Obama's Rubinistas.
Obama claims to be about "making tough decisions."
Alas, his base assumption and the assumption of his Rubinista advisors is that all economic decisions are measured by whether they help executives at big banks, Wall Street and big corporations.
Obama's actions have made it clear that his "tough decisions" only view the average American and the middle-class as a source of funds for those big banks and Wall Street. That, "tough decisions" don't include actions that increase investment in the United States - only profits for those companies and bigger bonuses for the executives.
I just don't see how, in this regard, Obama is all that much different from Repugnantones like Boehner or DeMint.
All of them act as if their job is to take from the poor and give to the rich.
30 years later Obama was ignoring Volcker because he was TOO LIBERAL to be taken seriously by the rest of his financial team.
Paul Volcker didn't change in those 30 years.
It is certainly true that this nation has moved far to the "right" over the last few decades... however, it has NOT become more conservative. Most true conservatives have left the Republican party and become independents. All that are left among its leaders and elected officials are the neocons who have betrayed practically every conservative principle there is.
My Aunt loved it because she got 10% interest.
We may NEVER forgive Carter for treating us like adults.
Americans should not have to live in indentured servitude because the economy cannot provide a job for them at a living wage, often because the banks and corporations use their undue influence in the political process to shape the economy for their own purposes, not for the good of the country.
PubliusEsq.blogspot.com