The blame game is in full swing among political operatives from the two major parties. Each is pointing fingers at the other, but both should look in the mirror if they want to answer our question: who is to blame for this economic calamity.
The bottom line, so to speak, to this crisis, where the bottom is not yet clear, is that both parties shared a common view that de-regulation of the financial markets, including the dismantling of key structures put in place after the 1929 crash and depression that followed, would introduce “efficiencies” and a lower risk financial environment.
Let me just point to two key reforms for which Democrats and Republicans share equal blame.
1) A regulatory loophole little known outside of Wall Street is called Rule 144A. 144A allows investment banks to peddle complex financial instruments to investors without registration with the leading capital markets oversight body, the Securities and Exchange Commission. Since its inception in 1990 (Republicans) the Rule 144A market has grown into a global multi-trillion dollar environment through which most of the mortgage-backed and other securities that have turned toxic in recent months flowed.
2) The repeal of the Glass-Steagall Act of 1933 in 1999 (Democrats) took down the firewall between investment banks, which are high risk entities, from commercial banks, which are more heavily regulated and were considered low risk. It was Citigroup that led the charge to take down the barriers between these two types of banks. And it was to Citigroup that Clinton’s Treasury Secretary Bob Rubin went when he left public office. A new softer form of protection was put in place to prevent the shift of deposits by individuals from being tapped by a mega-bank to support its other arm, higher risk investment banking. But now even that barrier is being taken down as safe cash is being drained to try to put out the fires in the high risk operations of entities like AIG.
3) While we are at it, let’s throw in the Supreme Court, too. Their critical 1994 decision, Central Bank of Denver, eliminated the risk that key gate keepers in the financial markets, such as investment banks, law firms and accounting firms, all of which are central players in designing and implementing the financial weapons of mass destruction that have now exploded on Wall Street, would face liability under federal securities laws for the role they played in creating this problem.
Both major parties played the same de-regulatory game and took down key institutional protections that helped cause the problem we are now enduring. This is not reassuring to anyone who wants to see a new government in Washington make constructive change that leads to a secure and productive economy.