Phil Gramm and Financial Services Deregulation

One of the reasons that the stock market crash of 1929 caused so many banks to fail during the Great Depression was that banks had invested their deposits in speculative stocks during the bubble years of the 1920s. When the stock bubble burst, the banks lost their money, and the government had to step in and start insuring our bank deposits to make banks safe again. Another reform was to prevent banks from getting involved in speculative securities. If banks were too important to let fail and the government was going to insure our deposits, the government wanted to regulate the kinds of risks that banks would be allowed to bear. Force the banks to bear their own risks and not pass them on in the securities market, and they’d be careful not to enter into risky mortgages with people who can’t afford them, right?

This worked great for the next 50 years, until the stock market bubble years of the 1990s, when there was so much money to be made in the market that bank lobbyists and friendly legislators got together to remove the regulations that prevented banks and securities firms from getting too intermingled in each other’s businesses. McCain economic advisor and former Senator Phil Gramm was one of the leaders of this effort. In fact, the legislation which deregulated the financial services industry was named the Gramm-Leach-Bliley Act. Yes, President Clinton signed the bill, there’s blame to go around.

So mortgage banks (IndyMac) were freed from the usual free market risk/reward incentive to be careful about who they gave mortgages to, because they could simply pass the risks on to investment firms (Bear Stearns, Lehman Bros.) who could bundle enough risky mortgages together to make they seem safe to investors. Everything would be fine unless a whole lot of mortgages defaulted, and THAT will never happen!

Phil Gramm removed the very regulations that prevented banks from assuming too much risk and then went to work for one of the biggest mortgage banks in the world (UBS). And this is the result of Gramm’s deregulation: The banks assumed too much risk, failed, and are now running to the taxpayers to save them from their own bad mortgage decisions. And once again, the banks are too important to let fail.

Now McCain wants to deregulate the health insurance industry just like his advisor Gramm deregulated the banks. Oh, and Gramm's name is floated all over the place to be McCain's Secretary of the Treasury. Sound good to you?