Ten years ago, before the collapse of the tech bubble and the inflation of the housing bubble, nearly everyone in Washington was convinced that Wall Street could do no wrong. The movers and shakers believed that if the government would just get out of the way of the men with the Midas touch, America’s domination of the global economy would continue uninterrupted well into the new century.
So said Sen. Phil Gramm of Texas, who authored a sweeping deregulation of the banking industry in 1999 that tore down the wall between banks and non-bank investment outfits that specialized in exotic speculative instruments.
Gramm’s bill was enthusiastically endorsed by the Clinton Administration, with then-Treasury Secretary Lawrence Summers leading the cheerleading. It passed the Senate by an overwhelming 92-8 vote and was signed into law by President Bill Clinton in a celebration of the ”freedom” embodied by an open-ended commitment to an unfettered financial marketplace.
The 1999 bill put the government’s stamp of approval on the creation of monstrous financial entities like AIG and a shadow banking system built on a hollow foundation of speculative greed. It eviscerated the protections of the 1933 Glass-Steagall Act, written at the nadir of the Great Depression. Glass-Steagall was designed to prevent such an economic catastrophe from ever afflicting us again; it created the FDIC and host of other agencies and regulations to keep the greedmeisters from running the banks into the ground.
In the forefront of the lonely opposition to Gramm’s bill stood Sen. Byron Dorgan, a plain-spoken and little-known lawmaker from North Dakota. Dorgan warned that deregulation would spur bank consolidation and facilitate greed-driven derivatives trading.
”What does it mean if we have all this concentration?” Dorgan asked in his 1999 floor speech opposing bank deregulation. ”The bigger they are, the less likely this government can allow them to fail.”
Dorgan also raised a red flag about a coming surge in high-risk derivatives: ”Federally insured banks in this country are trading in derivatives out of their own proprietary accounts. You could just as well put a roulette wheel in the bank lobby,” he said.
Dorgan introduced an amendment to ban banks from using proprietary accounts for derivative speculation and a plan to regulate hedge funds under the Investment Company Act of 1940.
”Those who cannot remember the past are condemned to repeat it,” Dorgan said at the conclusion of his eerily prescient 1999 speech in front of the Senate. ”With respect to the regulation of risky hedge funds and derivatives in this country — $33 trillion, a substantial amount of it held by the 25 largest banks in this country — we must do something to address those issues. That kind of risk overhanging the financial institutions of this country one day, with a thud, will wake everyone up and lead them to ask the question: Why didn’t we understand that we had to do something about that? How on earth could we have thought that would continue to exist without a massive problem for the American people and for its financial system?”
Dorgan was literally laughed off the floor by his colleagues. The Senate tossed out his amendments with a voice vote, exempting senators from taking public stances on the protections he proposed. Within a few days, Gramm’s bill became law. The rest, as they say, is history.
Nobody is laughing now.
Dorgan, still a senator, recently visited the White House and told the new president what urgently needs to be done:
— Appoint a blue-ribbon commission to investigate and identify the causes of the collapse of the global financial system.
— Create a Financial Crimes Division at the Justice Department and unleash a squad of federal prosecutors to round up the swindlers who destroyed our economy.
— Restore the provisions of the Glass-Steagall Act.
Thus far, Dorgan’s recommendations have not been acted on by the Obama Administration. Perhaps this is because the man who was sitting next to President Obama at his meeting with Dorgan was the president’s chief economic advisor, the primary architect of the administration’s plan to cure the fiscal calamity.
The president’s chief economic advisor is Larry Summers, the former Treasury chief who in 1999 thought it was a great idea to repeal the Depression-era protections of the Glass-Steagall Act.
Memo to President Obama: Fire Summers and hire Dorgan.