Sunday, September 21, 2008

McCain's Big Contribution to the Financial Crisis

Threatened by a likely meltdown of financial markets, Congress is moving moved toward a massive bail-out that could cost more than a trillion dollars. A small part of the problem is the sub-prime loans. The big problem is how they were marketed.

The threatened disaster is largely the result of efforts to weaken economic regulations that were put in place under Franklin Roosevelt to protect us from another depression. Former Senator Phil Gramm of Texas was the architect of this wrecking operation, and he had the enthusiastic support of his friend and sidekick, Senator John McCain. The Arizonan admits that he knows little about economics but incessantly brags that he isd a big deregulator.

Gramm crafted the most important legislation that opened the door to the unsafe practices that led to the housing disaster and placing 3,000,000 homes in danger of foreclosure. Phil Gramm’s Financial Modernization Act of 1999 gutted the Glass-Steagall Act, which was designed to protect our financial institutions. It removed the firewalls the New Deal had placed between securities firms, banks, and insurance companies. This led to a wave of mergers. Some say this act unleashed an epidemic of speculation that led to the bursting of the current speculative bubbles. As head of the Senate Banking Committee, Gramm had repeatedly turned down requests from the Securities and Exchange Commission to hire more people to investigate securities fraud.

Gramm’s Commodity Futures Modernization Act was a 261 page “Enron Clause” that was added to a huge omnibus spending bill December, 2000. Enron Corporation wanted this legislation and Gramm’s wife , Wendy, soon joined the Enron board. The act destabilized the California energy market. By deregulating energy markets, it paved the way for the Enron scandal and opened the door for abuses in energy trading, and accounts in part for high gas process. It also deregulated the trade in derivatives, which is based upon all the new debt instruments that Warren Buffett “financial weapons of mass destruction” designed by “madmen.”

Gramm’s deregulation made it possible to buindle sub-prime mortgages into a new form of security, thus hiding the problems with individual mortgages. Credit card accounts were also “securitized.”

Gramm is now a vice president and lobbyist for USB, a corporation that lost over 3o billion dollars this year. He is also co-chairman of the McCain campaign and Mc’s chief economic advisor. Analysts frequently mention Gramm as a likely Secretary of the Treasury under a President McCain. The Arizonan backed Gramm for president in the 1996 primaries.

The current crisis is so threatening that it forced the Federal Reserve Board partly back away from its main mandate—preventing inflation.

In truth, the precedent for bailing out failing firms was set by Jimmy Carter with the rescue of Chrysler in 1979. It promulgated the idea that investors in huge entities should be protected by the taxpayers. Carter also had a weakness for some market fundamentalist ideas and deregulated the airlines, which has led to all sorts of problems even before the great increase in energy prices . The truth is that there is a minority of Democrats in Congress who were smitten with some Republican notions, and their votes helped put in place policies that caused today’s economic downturn. Most of Democrats have learned how much harm their cooperation with Republican economics has brought. A large problem trouble is that John Mc Cain clings to these disastrous economic policies that do so much harm to rank and file Americans.
In the Reagan-Daddy Bush years, there were a few big bailouts in the mid-eighties and then the collapse and bail outs of hundreds of savings and loans and commercial banks under G.H.W. Bush. Most of this was due to a very lax regulatory atmosphere. It was a time when conservatives and some Democrats were attacking regulations as unproductive and unnecessary. Savings and Loan institutions were buying junk bonds and engaging in other unsafe practices, and Edwin J. Gray, chairman of the Federal Home Loan Board, tried to reign them in.

Charles Keating, president of Lincoln S & L in California took on Martin and tried to persuade President Ronald Reagan to put three Keating friends on the board. John McCain , a friend of Keating since 1981, worked hard lobbying Reagan. They managed to get one appointment. Mc Cain accepted $112,000 in contributions from Keating, and Cindy McCain and her father were permitted to invest $350,000 in a promising Keating shopping center. The Mc Cains enjoyed 9 vacations at Keating’s lush place in the Bahamas with Keating providing the transportation.

Eventually the board started looking into Keating’s business practices, and McCain fought hard for Keating, insisting that Gray have nothing to do with the investigation. In 1987, McCain rounded up four other senators, “The Keating Five” who started putting heavy pressure on the Federal Home Loan Bank Board to drop its probe. Keating was eventually sentenced to five years in prison. Mc Cain and John Glenn, both celebrities,
Got off with criticisms from the Senate Ethics Committee for poor judgment. Even then , John McCain has a superb public relations operation and succeeded in painting himself as the enemy of lobbyists. The fact is that he has not changed, and recently was involved in very heavy handed bullying of the FCC to bend the rules in favor of a contributor.

Mc Cain is now making vague charges about Obama being responsible for the financial meltdown because of vague ties to lobbyists. McCain’s campaign is loaded with lobbyists and he has a track record of doing their bidding. But this is only a tangential issue. The financial markets got into deep trouble because of legislation McCain championed that stripped away safeguards that were put in place under Franklin D. Roosevelt.

If the nation does not turn its attention to restoring and improving these safeguards, we will be looking at ever larger bail-outs down the road.

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