The 2008 $700 Billion Bailout: It Seems We Have Been Here Before

Think back to 1929. Amazing things happened in 1929: Martin Luther King Jr. was born. Popeye made his debut, Hoover was inaugurated as President, Al Capone was arrested on a concealed weapons charge and the stock market crashed. The Roaring Twenties, that glittering period of greed and excess that marked the second decade of the 20th century, came to an end on October 28th and 29th 1929, when the market not merely crashed, it embarked on a month-long slide into oblivion.

The culprit, ultimately, was speculation. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S.The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. A bubble burst eventually and this was no different. When the market started going south, people began to sell and there was a run on the market as people tried to save their financial positions.

Speculation, loose regulation, hopeless debt, and Wall Street firms behaving badly; that sounds oddly familiar.

In 1933, the government passed the Glass-Steagall Act (GSA) with an eye toward keeping this kind of financial meltdown from happening again. Democratic Senator Carter Glass of Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency, were the sponsors. There were actually two Glass-Steagall Acts, which created the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits up to $5000. The GSA also marked the first time currency was to be allocated for the Federal Reserve and it separated investment banking from commercial banking, which effectively curbed speculation.

Loosening the Restraints

It should be no surprise that this government-imposed discipline did not sit well with the banking industry, which saw millions of dollars off limits to them rather than reasonable restraint for the good of the financial industry and the nation. So, by the 1980s, banking industry lobbyists were pushing—and pushing hard—for a repeal of the GSA. Thanks to their lobbying efforts and the massive campaign contributions given to both Democrats and Republicans, the various sectors of the financial and real estate industries began to get their way.

Depository Institutions Deregulation and Monetary Control Act of 1980

This Act gave the Federal Reserve greater control over non-member banks in order to force all banks to abide by the Fed's rules. It also allowed banks to merge, allowed credit unions and savings and loans to offer checkable deposits, and removed the power of the Federal Reserve Board of Governors under the GSA and Regulation Q to set interest rates for savings accounts.

Garn-St. Germain Depository Institutions Act of 1982

This law created the adjustable rate mortgage and deregulated the Savings and Loan industry and was one of the major factors that led to the Savings and Loan crisis of the late 1980s. Supported by the Reagan Administration, the bill was named after its sponsors, Congressman Fernand St. Germain (D-RI), and Senator Jake Garn (R-UT).

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

This was the law that put the stake through the heart of the GSA once and for all. Where the GSA prohibited banks from offering things like investment, commercial banking and insurance services, the Gramm-Leach-Bliley Act (GLBA) put an end to that separation in the name of promoting competition among financial entities. What ensued was a frenzy of mergers as these companies tried to consolidate as many services as they could under one roof, giving us the financial services industry that we know today.

Fixing What Should Have Never Broken for Nearly $1 Trillion

Well, the financial services industry got what it wanted: near carte blanche to do as they liked. Fools on both sides of the political aisle were corrupted by the money and good times offered by the industry lobbyists and so blinded to the lessons of history. In 1929, the financial sector got out of hand, Wall Street did things that it shouldn’t, worked up massive debt and then it all fell apart. 1982 saw the end of Savings and Loan regulation and it all went to hell. Perhaps it’s a case of “third time’s the charm” and this time our so-called leaders will actually pay attention. After all, when Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with congressional leaders to discuss the crisis on the evening of Sept. 18, the lawmakers sat in stunned silence when they were finished and that’s not easy to accomplish.

Apparently, it is also difficult to get the Congress to act as quickly as the professionals in the Fed and at Treasury want them to. Representative Barney Frank (D-MA) said that Paulson "is being entirely unreasonable" to think that Congress will pass a bill at once without adding provisions Democrats want, such as the curbs on executive pay. "We want to limit those as a condition for giving them aid," Frank, D-Mass., told ABC's Good Morning America. “If Secretary Paulson would agree to that, we could move quickly."

I can understand where the congressional leaders are coming from. The idea that a CEO can drive his company into the ground and walk away with a multi-million dollar golden parachute is absurd, but it has been happening more often than anyone is—or should be—comfortable with. However, these don’t address the real issue. The entire mess could have been avoided. Yes, the socialization of our monetary system did not need to happen at all. All it took was someone in a leadership position to listen, to pay attention. There have been those in government—John McCain being one of the more vocal—who have been predicting this calamity for a number of years, only to be ignored by congressional leaders with a vested interest in having even the most financially unstable Americans in their own home—whether they could afford it or not.

The Bottom Line

I hate to say this, but we are left without a choice now; the bailout is a real necessity. Paulson is right when he points out that the cost of doing nothing will be far higher, but we cannot lose sight of the fact that this was not a systemic problem; it was a failure of people. It was a failure of people we trusted in government and in the financial sector. It was the result of myopic greed, just like the 1929 crash and the Savings and Loan crisis. It is the fault of a comparatively few people using their customers like pawns to drive their sales numbers so they could reap fat bonuses. It is also the fault of our elected officials who used their own positions of trust to benefit themselves rather than the people.

If there has, at any time, been a clearer signal that a general housecleaning is needed in the corridors of power, I don’t know of it. Because of greed and bungled policies, the taxpayers are going to have to shell out nearly $1 trillion and move to a more controlled economy. The executives who made the decisions that put us in this predicament must be forced to face the music. So should the people in government who allowed this happen at all. Anyone—Republican or Democrat, public or private sector—with their hands dirty from this mess needs to go.

The only question I have is if any one of them will have the grace or humility to exit the stage voluntarily, or will we see Clintonesque stonewalling and torturous rewrites of history over the next year or so to bolster feeble claims to innocence or, even worse, ignorance, among those who took part in the disaster or just stood by and allowed it to happen?