Was Obama Economic Envoy Part of the Problem?
| Wed Nov. 12, 2008 9:17 AM PST
The Obama transition office announced on Wednesday that the president-elect will send two representatives to meet with delegates attending the G-20 economic summit being held this weekend: former Secretary of State Madeleine Albright, a Democrat, and former Congressman Jim Leach, a Republican. The pair, according to a press release, will hold "unofficial meetings to seek input from visiting delegations on behalf of the President-elect and Vice President-elect." Afterward, Albright and Leach will brief Barack Obama and Joe Biden.
Leach is both a curious and obvious choice. First, the obvious: he's a Republican who led the Republicans for Obama effort during the presidential campaign. By calling on Leach, who had a long career in the House as a liberal GOPer, Obama can show he does believe in bipartisanship. Now the curious: during part of his stint in Congress, Leach chaired the House banking committee and shared responsibility for passage of the Gramm-Leach-Bliley legislation, which broke down the wall between commercial banks and investment banking.
Since the current Wall Street collapse began, policy wonks have debated whether this 1999 law led to the present troubles. But let's look at an Obama campaign statement released last March (when he gave a speech on financial regulation) that referred to the Gramm-Leach-Bliley Act:
Instead of finding the right level of government oversight in a vibrant free market, we've let the special interests set the agenda. Changes in the financial landscape, driven by technology and globalization, made the 1930's era Glass-Steagall Act--the New Deal era law that required that investment banking be kept separate from commercial banking--increasingly inefficient. While reform was desirable, the banking, insurance and securities industries spent over $300 million lobbying Congress to shape that reform to meet their own interests. In the two years before Glass-Steagall was repealed in 1999, financial service industries gave $58 million to congressional campaigns; $87 million to political parties; and spent $163 million lobbying Washington. But though the regulatory structure was outdated, the need for oversight was not. Unfortunately, in the rush to repeal the law to create immediate opportunities for certain Wall Street firms, little effort went into modernizing the government's supervision of the financial industry--to guard against the potential for conflicts of interest, to insist on transparency, or to ensure proper oversight of new and complex financial products or the dramatic rise of investment banks and non-bank financial institutions, like hedge funds and Structured Investment Vehicles. Nearly a decade later, our financial markets--and everyday Americans--are paying the price.
Paying the price--for a bill that Leach helped to usher through Congress. That's a tough critique.
Continues Below
Continued From Above
Former Senator Phil Gramm, the onetime Republican chair of the Senate banking committee who now is a high-paid exec for troubled Swiss banking giant UBS, has received plenty of less-than-flattering attention this past year due to his legislative efforts to deregulate the financial industry, including his advocacy of Gramm-Leach-Bliley. (See my piece on Foreclosure Phil.) That's because Gramm was a top adviser (and close pal of) John McCain and had been mentioned as a possible Treasury Secretary in a McCain administration.
But Leach shares responsibility for some of this deregulation and for legislation that Obama has blasted as the handiwork of corporate lobbyists.
It's doubtful that Leach is in line to be Obama's Treasury secretary. Obama and his aides probably want to keep whomever that might be far away from this week's summit--in order to make sure that they are not tied to whatever comes out of the George W. Bush-brokered gathering (if anything). But Leach, who first made a national name for himself as an arms control advocate opposing Ronald Reagan's nuclear buildup, could be in line for something. After all, he was the most prominent Republican who spoke at the Democratic convention for Obama.
Whatever award awaits Leach--commission chair, ambassadorship--he ought to be kept away from financial policy. If only to show that Obama was indeed serious when he assailed the lobbyists-driven failings of Gramm-Leach-Bliley.
Comments
Or, perhaps, the problem had much more to do with Government Sponsored Entities pooling weak loans secured by shaky mortgages and selling them as AAA investments to foreign governments, pension plans, banks, etc. There are no longer any investment banks, because they were doing the same thing - assisted, of course, by Fitch, Moodys and Standard & Poors, the three government licensed exclusive sources of those AAA ratings.
Gramm-Leach-Bliley has become the scapegoat of choice for those who want to deflect the actual culprit: Irresponsible lending mandated and underwritten by Congress via Fannie Mae and Freddie Mac. If you want to assign "blame" for Gramm-Leach-Bliley, you should also note that it was approved overwhelmingly by Congress (with majority Democrat support) and enthusiastically signed by President Clinton, who still defends it to this day. But that would sort of undermine the carefully constructed demagoguery, wouldn't it?
Gramm-leach-Bliley has very little to do with the current economic crisis. In fact, JP Morgan could not have saved Bear Stearns and BofA could not have saved Merrill if Glass Steagall was in effect.
Today's crisis is all about deleveraging. Negative savings rates, that is to say consumption greater than income, is not sustainable. Banks relaxed lending standards too much, partly at the urging of government. So now we have to pay off our debts and live within our means, which means reducing consumption below income. It's sort of that simple and everything else is a corollary.
But it has nothing to do with the "deregulation" spin peddled by politicians. This will be a painful, but necessary restructuring, and government intervention to prevent it will be futile and, ultimately, more costly.
I'm no fan of Barack Obama, but I agree completely with the statement you quote here. You misread it though. It's not saying that repealing Glass Steagal was misguided, it is saying that our goverment's failure to effectively regulate 21st century financial markets has had catastrophic consequences. Tough to argue with that no matter what your politics are.
"21st century financial markets" would have been fine had it not been for the gross distortions caused by Fannie Mae and Freddie Mac, jealously guarded from regulation by Democrats Chris Dodd and Barney Frank. This blather about the repeal of Glass-Steagall is manufactured for the Democratic narrative.
Gramm-Leach-Bliley had nothing to do with the financial crisis. In fact, Lehman Bros. and Bear Stearns did not avail themselves of the ability to play both sides. JPM and Chase did. Guess who's still standing.
The real cuprit in the crisis of course is 1995 admendments to the Community reinvestment act, cheap money by the Fed and the HUD and the Justice department tag teaming carots (using Fannie and Freddie to back bad loans and repackaging them as securities for sale) and stick (suing banks for not making bad loans.
I have yet to see anything remotely convincing on why the repeal of Glass-Steagall caused the current crisis. I can think of a number of other regulatory failures (reserve requirements ?) that could be the cause, though reporting on this topic has been superficial at best. I just cannot see why allowing banks to both investment banks and commerical banks, as is allowed in the rest of the world, was a bad idea. While JPM, BofA and Citi have troubles, these post-Glass Steagall entities are in much better shape than the old-stype pure I-Banks.
i think this was a piece of pure demagogary on the part of the Dems and they know it - hell, even Bill Clinton came out during the campaign and specifically defended GLB.
Submitted by Monte Asbury (not verified) on Wed Nov. 12, 2008 8:15 PM PST.
As an Iowan from Rep. Leach's district, I can tell you he always referred to himself as a foreign policy progressive and an economic conservative. Sure enough, he opposed the war from the beginning - while taking the economic positions you mention. His "fit" with Obama is in temperament and foreign policy, not economics.
Submitted by filim (not verified) on Thu Nov. 13, 2008 6:11 AM PST.
The real cuprit in the crisis of course is 1995 admendments to the Community reinvestment act, cheap money by the Fed and the HUD and the Justice department tag teaming carots (using Fannie and Freddie to back bad loans and repackaging them as securities for sale) and stick (suing banks for not making bad loans.
"In the two years before Glass-Steagall was repealed in 1999, financial service industries gave $58 million to congressional campaigns; $87 million to political parties; and spent $163 million lobbying Washington."
You might be interested to know that according to opensecrets.org Obama's campaign received (in thousands $) 229 from Merrill-Lynch, 582 from Citigroup, 425 from Morgan-Stanley, 874 from Goldman-Sachs, and 581 from J P Morgan (=2.7 million). In contrast McCain's campaign recieved 360 from Merrill-Lynch, 296 from Citigroup, 263 from Morgan-Stanley, 229 from Goldman-Sachs, and 215 from J P Morgan (=1.4 million).
Pretty audacious huh?
Repeal of Glass-Steagall had nothing to do with the current problems. Also, it's worth noting that the "connection" between campaign donations and Leach is much more than spurious, at least for his part, as Leach has never accepted PAC donations or even donations from individuals outside of Iowa.
