In 1987 Ronald Reagan's, anti-government free-markets philosophy had gained a solid foothold in the American economic physic.
The newly appointed federal reserve chairman Alan Greenspan (an Arthur Burns protégé) subscribe to economist Milton Friedman and philosopher Ayn Rand's laissez-faire philosophy of no government intervention.
In the early 90's a powerful private financial committee was formed in Washington D.C. to promote the free-financial markets philosophy and to overturn the last great regulation hold-out from the 1930's financial crisis, the Glass-Steagall Act. The boys title for the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."
By 1999 TIME's World section, takes you inside the most powerful economic triangle in Washington in its cover story on the Committee to Save the World, a.k.a. Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Deputy Treasury Secretary Larry Summers.
The Glass-Steagall Act was created after the first great financial crisis
The Glass-Steagall Act is the Depression-era law that separated commercial and investment banking. It was functionally repealed in 1998, when Travelers (the parent company of Salomon Smith Barney) acquired Citicorp. And it was officially repealed in 1999. And just seven years later the world found itself in another 1930's style worldwide financial crisis.
Recent events on Wall Street...the failure or sale of three of the five largest independent investment banks-have effectively turned back the clock to the 1920s, when investment banks and commercial banks cohabited under the same corporate umbrella.
Ironically the very ideology that said monopolies are bad and capitalism should allow bad businesses to fail...failed us. In the end we had private Capitalism of profits and excessive compensation but when the losses from those bad decisions came they were Socialized with taxpayer money. Amazingly both right and left wingers came together to say, "No Bail-Outs". Yet, the fear of systemic risk ( finance code for risk of collapse of an entire financial system or entire market ) seemed so great two presidents of two parties came to the same conclusion, government action not in action was required.
The architects of that failed philosophy now get promoted to clean up the mess. Thank you, Timothy Geithner and Lawrence Summers. These boys have make a great political living for themselves. Here is just one recent article on Larry Summers connections.
The Young Turk Gives Greenspan Advice
Last October Alan Greenspan, former Federal Reserve chairman, at a hearing on Capitol Hill (during the financial crisis) makes a profound self discovery. Greenspan Concedes a possible flaw in his thought process. This is classic Greenspan. He's incapable of admitting mistakes were made. Instead he carefully admits there may be a "flaw" in his ideology that says less financial regulation is always better for the public. He talks as if his decisions were based upon scientific models and rocket science rather than personal opinion.
Alan Greenspan is a classical intellectual. He's ideally suited to discuss macroeconomic issues, musical history and Adam Smith or Ayn Rand philosophy. Unfortunately that background is of little value in monitoring the realities of microeconomic details and human nature. He's not the type of detail oriented person you need to develop a minimal intrusive yet efficient and effective regulation system to protect America. And paradoxically the man who believed in free-markets and Laissez-Faire/hands-off government was in charge of the Federal Reserve, an entity created by government.
Over the last 10 years I've had the pleasure of listening to Treasury Wizard Greenspan speak many times. He is the master of grace and speaks with such elegance. Greenspan, a musician at heart, could make words dance to please democrats and republicans alike. Unlike others, I do not blame a few men or one party for the greatest financial crisis of our lifetime. There is plenty of blame to go around in Washington D.C., Wall Street and on Main Street. What's done is done. The question is will anything change for the better?
Listen to the PBS Frontline Special Report ( $25 DVD Video) for free (while we still have the viewing rights) below.
Shattering Glass-Steagall
The Senators, Economist and Glass-Steagall
