New York Times warns that new financial rules could "wreak havoc" -- 1999

From the 11/5/99 New York Times: "CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS By STEPHEN LABATON":

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system

CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS (11/5/99)

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

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Faustus

Wow, this is some awesome foresight from some people, and a terrible lack of it from the people in power…although they probably got their money whilst the going was good so they probably don’t give a shit.
zandar

BLAH BLAH BLAH!! Can’t hear you! Can’t hear you!
[jabbing ears with hot branding irons]

Ah… better. [takes sip from Starbucks vente half-caf with hazelnut syrup and whipped cream]
Anonymous

The same Larry Summers who thinks that women are too stupid to be scientists thought that this was a good policy?

The same Larry Summers who’s now Obama’s national economic director and in charge of getting us out of this mess?

That’s the kind of Change for which I was Hoping!
mccleary

Faustus — not everyone in power at the time lacked foresight — just the ones who yell the loudest. You may not like Ron Paul, but show me a single politician who nailed the impending crisis better than him.

Ron Paul, in 1999, on why he is against the bill:

“The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.”

“Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.”

http://www.house.gov/paul/congrec/congrec99/cr110899-glb.htm
Nancy Jane Moore

Very timely reminder. Seen Paul Krugman this morning?
Timothy Hutton

That rascal George Bush, I knew he wrecked the economy – him and his handler, Dick Cheney! the repeal of Glass-Stengal directly lead to the beginning of the end of our economy…

Hey, wait – this was ten years ago? That’s not right, that would mean…
Timothy Hutton

To Be Fair – from the NY Times article:

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”[emphasis added]

Wait, isn’t that the guy quoted in the Paul Krugman piece in Thursday’s New York Times saying that the best answer is for all of us to buy toxic assets, spreading the pain across millions, rather than concentrated on the folks that bought/traded them in the first place?
Anonymous

Bankers: “You see, the engine works much better when you wire down the safety release,”
NYT:”I’m not sure about this….”
Benny099

This is a complete non-sequitor. Did AIG fall under this deregulation? Did Fannie Mae and Freddie Mac? Nope, almost none of the major players in the economic crisis had anything to do with the repeal of the Glass-Stegall Act. In fact, the act allowed private entities to buy up parts of Lehman Brothers, and take a lot of the pressure off the FDIC, SEC, Fed, etc.

You can’t connect the dots between this deregulation and today’s problems because there is NO connection. But keep enjoying your regulatory fantasies.

The funny thing is almost all the bad stuff that happened was against EXISTING regulations. Had their regulators done their jobs under existing law, much of this would have been prevented. Unfortunately overseers like Barney Frank and Maxine Waters assured us there were no problems with Fannie and Freddie, and the headed off the action urged by both McCain and Bush.

This is NOT to say that the GOP bears no responsibility. I see this wholly as typically short-sighted government intervention in the economy that created perverse incentives. But you go on and blame something from 1999 that had nothing to do with any of this. The rest of us will look for solutions in reality, not fantasy.
mspieg

@ #8:

Yep, Michael Moore wasnt that far off when he once referred to Clinton as the most successful Republican president in a generation (or something like that). It’s easy to forget in the post-Bush years, but back during the Clinton era, thinking Liberals were deeply unhappy with Clinton precisely because he was such a free-market-loving, Republican-thunder-stealing, triangulating New-Democrat motherf*cker. Anyone remember Welfare “reform”? Hopefully Obama will be more of a true, old-school Democrat.
Xenu

Libertarianism sure works wonders, doesn’t it?

I mean, I used to have a 401k and a retirement. Now, thanks to Libertarianism, I have nothing. Thanks, Libertarianism!
Thebes

The problems didn’t start with the repeal of the Glass-Steagall Act. They started with the Federal Reserve Act and have been assured since then. The Fed caused the First Great Depression and certain measures were put in place to ensure it didn’t happen again, over time it was necessary to erode these protections to ensure continued economic growth. Ending the gold standard allowed a generation of continued prosperity, but made our money nothing more than paper. The ending of Glass-Steagall got us a few more years of growth, but its making the fall of our monetary system that much worse. The same could be said about the intentional building of the mortgage, consumer credit and derivatives bubbles… of course only one of those has burst so far.

The Federal Reserve System causes monetary inflation. This is because money is created out of thin air (yes, really!) and lent at interest. In order for that initial loan AND it’s interest to be paid back requires that more money be lent. Since lending must continually increase, the economy must continue to grow so more money can be lent so the economy can grow. When the economy stops growing it implodes. No fiat monetary system has even stood the test of time and ours is no exception.
Takuan

Karl Rove afraid to use his own name?
Phikus

Mspieg@10: Exactly why I didn’t vote for Gore in 2000, not that it mattered. Also Joe Lieberman.
Brainspore

Blaming either Bush or Clinton for this crisis is giving them both far too much credit. This level of screw-up was only made possible by decades of coordinated, bipartisan idiocy in both the executive and legislative branches.
Anonymous

It amuses me tremendously to be reminded that grownups used to say the words “new economy” with a straight face.
catbeller

#1: The banks and others that were “doing both” packaged their risks and processed them into AAA rated investments that almost every bought (retirement funds and other such regulated market funds are required to buy AAA investments), so they indeed killed even the banks that were not.
Gary61

“The Sky Is Gonna Fall, The Sky Is Gonna Fall!”
nobody believed him, either.
Timothy Hutton

CATBELLER said:

To fix it, you need public financing, guaranteed access to media for candidates, and complete exclusion of contributions from individuals and corporations. Complete, and no excuses. And also, firewall the corporate world from politics.

Add Union/Labor Organizations to that list and you might be on to something.

Also, anyone notice that all the jobs being stimulated by our recent bills seems almost exclusively focused on either creating or sustaining union jobs? (What a coincidence!)
Takuan

maybe because union jobs have been systematically raped by government for the past eight years?
DWittSF

Now you know who fought against campaign reform in the mid 90s. The finding that ‘money equals free speech’ left the door wide open for billions of dollars in campaign contributions and lobbying money (ie. legal bribes) to flow to willing Congresscritters on both sides of the aisles–from just the financial sector alone. The booty that flowed to the politicians is what led directly to this horrible legislation, and eventually poisoned the whole system.
Takuan

(ship deserting a sinking rat:
http://www.cnn.com/2009/POLITICS/03/27/gop.comeback/index.html
airshowfan

This looks familiar… Oh yeah,

http://www.boingboing.net/2009/03/24/democratic-north-dak.html

Then again, if something deserves being BoingBoinged twice in three days, this is it.
mdh

Seems to be a Ms. Miller and a Mr. Blair recieved promotions not long after this piece of actual reporting. Hmmmm?
wolfiesma

I’ve been hearing too much about these “shovel ready” projects getting the green light. I hadn’t considered that it was to create more union jobs. Regardless, I don’t see why we should point the finger at unions. If it is local and state governments that will be getting lots of stimulus dollars, then it is up to them, us, to make sure the money is going to create jobs in sectors that make the most positive contributions to society… and I’m sorry, but construction just ain’t it.
Ned613

The basic argument for repealing Glass-Steagall was that the with Glass-Steagall the US banking industry would not have been able to compete globally with foreign banks that were able to offer commercial and investment banking services under one roof. Of course there are always going to be dissenters to major policy changes because of vested interests and such. To pin our current economic problems on this policy change is simplistic in the extreme.
Fiddy

Links to this article have been circulating as viral emails since last September. I’ve received it at least three times now. Yes, it is startling how even the NYTimes expressed caution over this legislation, but Ron Paul and others were shouting about this at the same time, and most of the media ignored their warnings. Four years later, Paul was also warning that invading Iraq was a big mistake too, but again, the media ignored him, and even ridiculed him for suggesting that G.W. Bush may not have all his ducks in a row.

Remember how Ron Paul was shouted down in the early Republican presidential debates? Rudy Giuliani even demanded that Paul apologize for suggesting that Bush and Clinton’s interventionist foreign policy may have contributed to the mistrust of our motives in the Arab world. The September 11 attacks were by no means justified, but Paul had the courage to suggest that the motivation of the terrorists could be understood if you examine how the Islamic world feels about U.S. intervention in their affairs. He refused to apologize for speaking the truth, and was mercilessly ridiculed and dismissed by the press as a lunatic fringe candidate with no chance of ever securing the nomination of the GOP.

One thing that has developed now is that hundreds of thousands of people are finally taking Ron Paul seriously, and he’s organizing a remarkable group of volunteers around the Campaign for Liberty that promotes economic literacy and opposition to the surveillance state we now take for granted after the U.S.A. PATRIOT Act made us all potential terrorist suspects.

His latest act of sedition is H.R. 1207, a bill that would amend the charter of the Federal Reserve Bank to permit the Congress to conduct a regular audit of the bank’s operations and finances. You’d think such a rule would be standard operating procedure for running any kind of financial institution, but for some reason, the bankers and politicians who drafted the Federal Reserve Act in 1912 neglected to include such a provision. Because this rule does not yet exist, and transparency was not included in the T.A.R.P. legislation passed last year, the Fed has no legal obligation to tell anyone what they are doing with the Bailout money.

Henry Paulson and Timothy Geithner may be the only people in the entire world who know exactly where the money is going. And they don’t even have to pay their taxes!
daemonsquire

I second Airshowfan: post about this as much as you like! My politically conservative debating opponents have been fwd’ing one another links to another NYTimes article, from a month earlier in 1999, hoping to place responsibility for today’s economic mess on Fannie Mae’s decision to ease credit requirements on its loans.

Matt Taibbi’s Rolling Stone article, to which guest-poster Mr. Metzger also linked here a few days ago, does a good job of explaining why the financial rule change we’re talking about in this post has made the relaxing of lending standards much more ruinous than it could ever have been on its own, IMO.
Anonymous

This had nothing to do with, we could have only wished that products like Credit Default Swaps (CDS) were regulated like banks or brokerages. If you want to point to some legislation that DID cause problems, you’d be better off pointing to the Commodity Futures Modernization Act of 2001. Now that puppy DID solidify the non-regulation of certain kinds of derivatives (cough — CDS — cough).
catbeller

#14: Well done. Two very, very bad Supreme Court decisions led to this intractable disaster.

First: the nineteenth century decision that a corporation was a citizen with full rights, such as the first amendment right to speak, as individuals rather than companies of businessmen.

This was an interpretation by a SCOTUS clerk that used to be a railroad trust lobbyist, not the decision of justices themselves! Yet it stuck in law by the concerted assumption of corporations that it actually happened. So weird.

And as you say, the second was the 1990′s Nixon/Reagan Supreme Court majority decision that financial donations to campaigns was protected as free “speech” under the first amendment.

It didn’t require calculus to predict what happened next. The corporations “spoke” in their billions of dollars and bought the government outright. Let’s not weasel here. They purchased our representatives. And the reps that didn’t go along were pummeled out of office by corporations financing their opponents.

To fix it, you need public financing, guaranteed access to media for candidates, and complete exclusion of contributions from individuals and corporations. Complete, and no excuses. And also, firewall the corporate world from politics. No after-office consulting or speaking tours paid for by interest groups. No CEO’s like Cheney pretending not to be a CEO of Haliburton while he funneled money into his company’s pockets. And his own as well. Academics and lawyers, sure. But no more businessmen operating the regulatory mechanism of their own industries.

If you want to lobby, you’d better have a damned good idea, instead of a wad of money.
catbeller

This morning, I was skimming The Demon-Haunted World: Science as a Candle in the Dark by Carl Sagan and Ann Druyan.

They mention the derivatives market as a particular danger to the human race in the same sense as a nuclear device.

That was 1997. Smart people have been sounding the warning for a very long time. If you can’t understand the financial instrument, then they are hiding something. Basic rule.
Itsumishi

Libertarianism sure works wonders, doesn’t it?

I mean, I used to have a 401k and a retirement. Now, thanks to Libertarianism, I have nothing. Thanks, Libertarianism!

Please do some research onto what the word Libertarianism actually means before complaining about it.
Xenu

I’m referring to American Libertarianism. The kind where “freedom” includes the freedom to run a business with little or no regulations.
Anonymous

All the repeal of glass-steagall did was allow banks to participate in both investment and commercial banking. But the banks that are doing both aren’t the ones that have failed. Ergo, the repeal of glass-steagall didn’t cause the problem.

This is easy stuff…
Big Ed Dunkel

As Big Bill Clinton said, “We need to worry less about our economy and more about the financial state of the country.”

Fucking idiot.
zawan

”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930′s is true in 2010,”

WOW
Petey

Oh look, it’s Lawrence Summers pushing deregulation as the solution to complex financial problems.

Well didn’t he turn out to be a big doofus in public? It’s a good thing he’s not still forming economic policy for the country, certainly not economic policy based upon the same failed principles that led him to support the repeal of Glass in the first place.

Gee, sure am happy he’s gone.

## end sarcasm

## begin crushing sense of anger and despair
Phikus

Deregulation would be abused by the greedy to the detriment of the rest of us all, risking economic catastrophe? Who knew?