Gramm-Leach, Glass-Steagall, and Bill Clinton
September 17, 2008
by William P. Meyers

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In the last couple of weeks some of the nationally known pundits, and the Barack Obama campaign, have started talking about how the Gramm-Leach-Bliley banking bill, which overturned the Depression-era Glass-Steagall act, has played a major part in the mortgage finance disaster of 2007-2008. I posted an article, Housing, the Credit Squeeze, and Glass-Steagall Act, back on February 4, 2008, when no one wanted to talk about the subject.

During an election, if the economy is bad, there is a tendency to blame everything on the party in power. Senator Obama's attacks on Senator McCain about Gramm-Leach-Bliley are not unjustified. However, Obama's party, the Democratic Party, was just as responsible for repealing Glass-Steagall as the Republican Party. Given Barack's spineless political career we can surmise that he would have voted for Gramm-Leach like everyone else, had he been in the Senate or House of Representatives at that time.

At the shallowest level, we are simply seeing the usual political-economic cycles that have been taking place since the first flint ax was traded for the first sea shell. Mixing ordinary banking (taking deposits, making loans) with Wall Street style banking (creating and trading stocks, bonds, and more complex financial instruments) was clearly a cause of the Great Depression. So Congress built a firewall with Glass-Steagall. At the time the bankers were bankrupt and unable to bribe their way out of the situation.

But when no fire transited from banking to brokerage houses, or vice-versa, for a number of decades, pressures began to build. That firewall did not just prevent fires, it prevent people from making quick bucks. Flexible politicians were found, particularly new ones who did not remember the Great Depression. One of the most flexible modern politicians was Bill Clinton, a Democrat. He named Robert Rubin to be his Secretary of the Treasury, and he kept Alan Greenspan as Federal Reserve Chairman. Think of these men as voracious predators with no respect for anything put power and money. Together they put in place the key "reform" that allowed the rapacious mortgage and derivatives frenzy of 2004-2006. Now taxpayers will be further burdened to clean up the mess.

So what is Senator Barack Obama going to do about it if he becomes President? What will Senator McCain do about it if he becomes President? The standard answer seems to be: make the Federal Reserve more powerful. None of the old "power to the people" solutions are even conceived of, except perhaps by Green Party candidate Cynthia McKinney. But it was the Federal Reserve that helped pressure Congress into repealing Glass-Steagall.

Politicians will say anything to get elected. Congress, not the President, is supposed to write the laws. Most American citizens vote without knowing anything about their representatives in Congress. Until people are better informed and more able to exercise power directly, don't expect any major changes in our system.