As I write this, we have a new president who is promising initiatives to cure the current economic crisis. We wish him well and hope his efforts work.
The financial meltdown that we have experienced will no doubt be the subject of extensive analysis in the years to come. There will be plenty of finger-pointing and attempts to fix the blame, much of it politically motivated. The big question will be: Did we learn anything that will help avoid future meltdowns? History, I believe, indicates that economic memory is short and the most likely answer to that question is no.
I say that because even now a realization is starting to set in that the cause of the bank meltdown started some years ago when a cardinal rule was violated. The rule in point: “Never tear down a fence until you know why it was put there in the first place.”
In 1933, following the “bank holiday,” Congress passed the Glass-Steagall Act, which essentially placed a wall between commercial banks and commerce. It prohibited them from collaborating with full service brokerage firms or participating in investment banking activities. The purpose was to protect the depositors from the additional risks of security transactions.
As time passed and memory dimmed, major banks lobbied hard to tear the fence down so they could expand into the world of commerce. In an act of supreme arrogance, Citicorp merged with Travelers using a loophole in Glass-Steagall that permitted temporary associations, and then they went to Congress, after the fact, to make it legal on a permanent basis. To make it legal the fence provided by Glass-Steagall had to go. Led by then Senator Phil Gramm and cheered on by then Treasury Secretary Rubin, the Gramm-Leach-Bliley Act was passed in 1999 and the fence came tumbling down. Among other things, mortgages were bundled as securities and the result of that appears in the daily news.
But the banks have had help, and warnings that also go back to 1999. In an article which appeared in the September 30, 1999 issue of the New York Times, Steven A. Holmes had this to say, “In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
“The action, which will begin as a pilot program involving 24 banks in 15 markets–including the New York metropolitan region–will encourage those banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.