The 2008 Economic Crisis

I have my own reasons for disapproving of the recent bailout plan, but most of it has to do with the blatant excesses enjoyed by the CEOs and other top executives at the now-failing companies, as well as their poor business choices to engage in an extremely risky industry for sheer profit gains. But what I am going to share here is the history of how we got to where we are today, and urge you to fact-check and do your own research to come to your own conclusions and opinions about the current state of economic affairs in our country. And please, post links to relevant resources and facts that you may have come across in your own research.

1. 1982: the Garn-St. Germain Depository Institutions Act is passed and basically de-regulates the Savings and Loan industry. S&L's start handing out cheap mortgages while simultaneously making risky investments that had no standards/ models of worth and ultimately (7 years later) result in a lot of bad debt and worthless assets. (Translation: not a very good business strategy).

2. 1985: Richard Pratt, the chairman of the Federal Home Loan Bank Board, starts to see where the S&L industry might be headed and institutes a rule to limit the types of investments these companies can engage in. It should be noted that when a greedy company is already well-invested in something, rule or no rule they're probably not going to pull out when the money is (or rather "seems") good. And this is promptly what some of the S&L companies did (including Charles Keatings' infamous Lincoln Savings & Loan Association).

3. 1989: S&L companies start going belly-up. The Resolution Trust Company is formed to buy up the bad debt of some 747 S&L companies with $125 billion in taxpayers' money.

4. 1999: Phil Gramm (remember that name!) comes along and pens the Gramm-Leach-Bliley Act which clears the Senate. This bill repeals portions of the Glass-Steagall Act which was passed in 1933 to curb the speculation and bank consolidation factors that lead to the Great Depression. Good idea, huh? So now, banks are able to have more mergers and to become more directly involved in the stock market, bonds, and insurance. This means banks can be a savings bank, an investment bank, a brokerage AND an insurance provider all-in-one.

Are you getting all of this? The S&L industry set up its failure through deregulation, and now banks are being deregulated. 2 + 2 = ???

5. 2000: Phil Gramm comes up with the Commodity Futures Modernization Act and slips it into a "must-pass" spending bill on the last day of the 106th Congress. This expands the scope of futures trading, creates new modes for speculation, and limits the scope of regulation for investments. Enter unregulated "credit default swaps" (insurance that banks could exchange back and forth, but an item on which no one could pin any actual worth - name your price!).

Okay, so I said remember the name Phill Gramm. I should mention that the past couple of bills I mentioned were largely crafted with the help of industry lobbyists, aka scum-of-the-earth. The most famous direct result caused by Gramm's deregulation was the "Enron Loophole" that exempted energy trading from oversight, written by lobbyists working with Gramm. EnronOnline was born, electricity trading had no oversight or transparency, and the results were 38 Stage 3 blackouts (previously there had been only ONE of these Stage 3 blackouts in the entire history of CA), wholesale energy prices increased 3000% (despite a production capacity equal to 4X the demand), the public utility companies were going bankrupt and the governor was forced to sign private energy contracts while the state of CA lost $11 billion to Enron.

Phil Gramm was also John McCain's chief economic adviser until in the middle of our economic meltdown he called America a bunch of "whiners" making for bad press. McCain immediately distanced himself from Gramm, but up until that point he had praised Gramm as "one of the smartest people in the world on the economy."

But back to the 'real' economy!

7. Credit default swaps allowed home down payments to become 3%, 1%, 0%, no credit check necessary, no employment requirements ... are you starting to see how someone who couldn't necessarily afford their mortgage was able to acquire it in the first place? These credit default swaps made the sub-prime mortgage industry possible. And the banks started trading them like an investment that kept growing in value, collecting the fees relatively effortlessly. However, being that the swaps were completely unregulated the banks/ trading companies didn't need insurance to cover the potential losses if anyone were to default.

Here's a snapshot of the industry value last spring (2007), as discussed by business correspondent Bob Moon on American Public Media's Marketplace:

• Value of the entire U.S. Treasuries market: $4.5 trillion.
• Value of the entire mortgage market: $7 trillion.
• Size of the U.S. stock market: $22 trillion.
• Size of the credit default swap market last year: $45 trillion. (3X the whole U.S. gross domestic product!!)
  

Though it is now coming to light that these swaps may have actually totaled $70 trillion, or $5 trillion more than the GDP of the entire world!!!

8. 2008 Financial Crisis Snapshot:

• March 16: Bear Stearns collapses and is purchased by JPMorgan Chase for $2/ share (just last year shares were being traded for $170 a piece). This was supposed to curb the industry hits due to the sub-prime meltdown.
• September 6: The government seizes Fannie Mae and Freddie Mac.
  
• September 14 (Sunday): Bank of America buys Merrill Lynch for $50 billion.
• September 14 (Sunday): Lehman Brothers files for bankruptcy.
• September 16: AIG purchased by the government for $85 billion.
• September 19: President Bush announces $700 billion bailout plan to rescue banks from bad debt by purchasing illiquid assets.
• September 25: JPMorgan buys Washington Mutual for $1.9 billion.
  
• September 27: Wachovia enters talks with potential buyers as shares plummet.
• September 29: The House of Representatives rejects the "bailout" plan and the Dow Jones Industrial Average drops 777 points.
• October 1: The Senate passes "rescue" plan with an additional $110 billion in pork barrel spending, bringing the total to $800 billion in taxpayer spending.
• October 3: The House passes the "rescue" plan.

To summarize, the consistent deregulation in speculation, consolidation, trading and investments opened the doors for the very practices that we are now seeing as the root causes of failure for these large financial institutions. In a free market capitalist economy, some would argue that companies should be allowed to conduct business however they want, and that it is not the federal government's responsibility to regulate private institutions. (But the Federal Deposit Insurance Corporation is a good thing because I want my money to be protected in case the practices of my bank jeopardize my personal savings.) It is this mentality that I think is extremely dangerous and destructive in any economy; this separation of individual and consolidated wealth and the idea that one doesn't depend on the other.

Congress has a responsibility to regulate commerce based on Article I, Section 8 of the Constitution. The current crisis is the second time in the past two decades that private corporations have relied on the taxpayers to foot the bill for their predatory practices. I believe it is therefore necessary for rules and regulations to be established regarding the conduct of these large investment firms. No one likes regulation. But the fact of the matter is that money has the ability to feed greed and power and to cloud good judgment when money becomes the sole objective.

I close with this quote from Upton Sinclair: It is difficult to get a man to understand something when his salary depends upon his not understanding it.

History
More History
Bear Stearns deal
Lehman Brothers fails
AIG's deal
Dow Jones Industrial Average Historical Prices
The S&L Crisis and Its Relationship to Banking