Photo credits: Gabriel Chmielewski/College Station Eagle, via Associated Press
Wingnuttery has a price...
Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don’t have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what’s happening now is the quid without the quo.
Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.
But will that logic prevail politically?
Not if Mr. McCain makes it to the White House. His chief economic adviser is former Senator Phil Gramm, a fervent advocate of financial deregulation. In fact, I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible.
That's right--Phil Gramm. He of the wildly popular Presidential campaign that went no where. He of the electrifying personality. He of the wingnuttery of the 90s known as "deregulation" that has placed our current financial system in jeopardy. Does this set off any kind of warning bell for you?
The collapse of Enron Corp. has drawn new scrutiny of a powerful Washington couple who between them played prominent roles in deregulating energy trading to the benefit of the company.
The couple, U.S. Sen. Phil Gramm (R-Texas) and his wife, Wendy Gramm, who serves on Enron's board of directors, both know Enron's top executive, Kenneth Lay--and have benefited financially from their relationship with him.
Phil Gramm has collected more than $97,000 in campaign contributions from Enron, according to the advocacy group Public Citizen. Wendy Gramm was paid between $915,000 and $1.8 million in salary, attendance fees, stock options and dividends over the past eight years, the group concluded.
"What has all of this bought" Enron, asked Sheila Krumholz, research director for the Center for Responsive Politics. "Has this bought them cover?"
In the early 1990s, Wendy Gramm, then chairwoman of the Commodity Futures Trading Commission, moved to lift governmental oversight of energy contracts that Enron and other companies traded. A short time later, she was appointed to Enron's board of directors.
And in December 2000, Phil Gramm helped clear the way for a bill turning his wife's deregulation decision into law, something Enron had long wanted.
The Commodity Futures Modernization Act, of which Phil Gramm was a sponsor, contained a clause making the exemption law. Though it is now called the "Enron exemption" on Capitol Hill, a Gramm aide said the senator had not prepared that section of the bill.
See, every time you deregulate something, it opens it up to the predators who swoop in and ruin the industry. Or it allows the fatcats to plunder the treasure and (almost) get away with it. There's nothing wrong with the idea of getting government regulations out of the way of people who want to grow an industry. The problem is, once the government opens something up for abuse, there are specially trained people who are savvy enough to come in and make a killing or work from the inside and ruin that industry and then walk away. Does the Savings and Loan Industry bailout ring a bell?
The Savings and Loan Crisis resulted in the failure of over 1,000 banks with over $500 billion in assets on their books. The FDIC estimates that the total cost to resolve the crisis was $153 billion. This was needed to administer the closing of defunct banks, pay the insurance on savings account deposits, and pay off other debts. Of this, the taxpayer cost was $124 billion.
The Fed's bailout in the current Banking Liquidity Crisis has totaled $64 billion in the form of loans to member banks. If the Fed's actions are successful, and liquidity is restored, then the money will be repaid, and it shouldn't cost the taxpayers directly.
However, no ones really knows exactly how deep the Subprime Mortgage Crisis goes. This was also the problem with the S&L Crisis, and the reason costs kept mounting. In fact, it took nine years before the full extent of the S&L crisis was known.
The current crisis is further complicated because it probably extends beyond real estate. The financial firms that repackaged mortgages into mortgage-backed securities did the same auto loans, credit card debt, and corporate debt. These Collateralized Debt Obligations (CDO's) have been bought by corporations, mutual funds and pension funds. Therefore, the extent of the potential bad debt is completely unknown, and this is what is scaring Wall Street, economists...and the Fed.
So you have Phil Gramm, king of deregulation, advising John McCain on economic matters. It's ironic that the bailout of the Savings and Loan Industry comes up in polite conversation again because it reminds us of this little episode:
Senator McCain had taken $112,000 in Keating-related campaign donations, trips aboard Mr. Keating's corporate jet and family vacations at the executive's Bahamas hideaway. While legal, these gifts made his attendance at the meetings with federal regulators all the more questionable. (The other four senators had also taken large contributions from Mr. Keating, some of them far more than Mr. McCain.)
He survived and was re-elected easily in 1992 and again, with almost 70 percent of his state's vote, in 1998. Three other members of the Keating Five were more seriously rebuked by the ethics panel and all of them retired rather than face difficult re-election battles. John Glenn of Ohio, who was exonerated with Mr. McCain, was also re-elected in 1992, but retired in 1998.
What did McCain do between 1992 and 1998, you ask? Well, one of the things he did was co-chair Phil Gramm's disastrous run for the Presidency in 1995.
I can't wait to see the bill they will try to hand the American people if they ever get their hands on the US Government.