Paul Greenberg / December 8, 2008

Myth No. 87

It appeared, in all places, as a closing item in the fall issue of a little religious newsletter I get here in Arkansas. Somewhere in between the ecumenical conferences coming up and the comings and goings of local preachers, the nice lady who puts it out couldn’t resist an editorial comment in the spirit of the season, namely the campaign season:

“A tribute to my late and great neighbor, U. S. Senator Joseph T. Robinson from Lonoke. The Glass-Steagall Act of 1933 was steered through the Senate by him! This was a summit of good lawmaking after the 1929 market crash, and our senators saw the cause and how to remedy such greed, for this law imposed strict regulation and accountability. It would prevent wild speculation that put the assets of others at risk, and the approach worked! Then, sadly, politicians embraced the same creed that blew up in the 1920s. Will we ever learn? This act has been gradually dismantled, especially in the last eight years. Just look at the catastrophe! For unchecked greed will always prove to be irrational.”

Like most good campaign myths, there is enough fact here on which to build an airy tower of fiction. The Glass-Steagall Act, enacted as part of the New Deal’s first Hundred Days of emergency legislation, did indeed erect a wall between commercial and investment banking. But it never made it to this century. The Glass-Steagall Act was repealed in 1999 by a bipartisan coalition in Congress, and with the full support of Bill Clinton, as the bubble was reaching its height. The firewall between commercial and investment banking was gone, and it’s unlikely to be restored.

Having been eroded by various administrations over the years, and with the financial industry champing at the bit to try all kinds of new and exotic investment instruments, what remained of the firewall between commercial and investment banking was finally torn down. The moral of the story: What we learn from history is that we seem to learn very little from history.

Yet the myth persists that the deregulation of the financial markets took place largely during the Bush administration. This pseudo-history became a mainstay of Barack Obama’s presidential campaign. Here’s how he put it in his second presidential debate with John McCain when the current tumult in the financial markets came up: “I believe this is the final verdict on the failed economic policies of the last eight years … that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on us.”

Actually, it was early in the Bush administration that another bipartisan coalition passed the Sarbanes-Oxley law, which re-regulated Wall Street after it had been shaken by a series of scandals. (“Some lawmakers called it the most sweeping securities legislation since the 1930s.” –New York Times, Page 1, April 25, 2002.) George W. Bush signed it into law over the vigorous objections of business interests and the accounting industry. So much for the great deregulation of the past eight years.

This year’s presidential campaign is over now, Barack Obama is president-elect, and as reality dawns, he continues to rise above his campaign rhetoric. By now he’s on track to dismay the hysterics on both ends of the political spectrum: those who had him pegged as some kind of wild-eyed radical who would turn the American system upside down, and those who hoped he would.

Candidate Obama is now President-elect Obama, and his talk of punitive taxes – on the rich, on the dead, on American capital in general – has been put on hold. Just as his misconceived “windfall profits” tax on the oil industry, a throwback to the disastrous economic policies of the Carter administration, has been quietly shelved.

Note the team of realists the next president has just appointed to handle financial policy. It’s composed of familiar faces, and there’s not a radical in the bunch: Tim Geithner, who played a leading role in the current administration’s day-to-day responses to the economic tsunami that struck the country this fall; Paul Volcker, chairman of the Fed during the Reagan years; and Larry Summers, longtime advocate of free trade who lost his post at Harvard for saying politically incorrect things. (So much for Barack Obama’s rhetoric about re-negotiating NAFTA, which was clearly for campaign purposes only.)

At this rate, there should be a seamless succession between the Bush and Obama administrations when it comes to stemming the financial Panic of ‘08 and its aftershocks in '09.

The campaign is definitely over. The myths will go on.

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