The Great American Stickup: How the Political Class Mugged America and Handed the Money Over to Wall St.
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Goodman: As we continue our discussion on the state of the economy, we’re by veteran journalist and Truthdig.com editor Robert Scheer. His book is just out; it’s called The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street . What is wrong with the economy today? And how did we get here?
Scheer: Well, you know, you say a longtime journalist. I worked for the Los Angeles Times as a national reporter, and I covered these hearings in Washington when the Clinton Administration in the '90s basically fulfilled the promise of the Reagan Revolution. Reagan was not able to reverse the sensible regulations of the New Deal of Franklin Delano Roosevelt designed to prevent us from getting into another depression. And those regulations of Glass-Steagall, which Feingold was against -- was for keeping and against reversing, said that investment banks playing with supposedly rich people's money should not be allowed to merge with commercial banks that were using the deposits of people that were insured by the taxpayers and that these were different activities. And Reagan could never pull off that kind of deregulation. In fact, because of the savings and loan scandal at the end of his term, he actually had to sign off on increased financial regulation. But when Clinton came in, he brought in one of the big players on Wall Street, Robert Rubin, who has been head of Goldman Sachs, and basically turned to him and said, "You know, what do I need to do to get Wall Street on my side?" And they said, reverse what they considered to be onerous financial regulation. And Clinton delivered on that. He brought in Rubin then to be his Treasury secretary, who was followed by Lawrence Summers, who’s now the top economics adviser in the Obama White House.
And in addition to the Gramm bill that reversed Glass-Steagall, he did something even more significant for our current crisis. He -- after Summers had pushed it through, Congress signed off on the Commodity Futures Modernization Act of 2000. He was already a lame duck president. It was in the closing weeks of his administration. And this is the source of our whole problem, really, in terms of the housing meltdown, because we had these suspect derivatives that sensible people in the administration, like Brooksley Born, had warned against. No one knew what these toxic investments all about, the bundling of mortgages, which is what encouraged all of the wild subprime and Alt-A financing, because they were then going to be packaged together, made into securities, and then backed by credit default swaps, and all of this stuff that really didn’t exist. It certainly didn’t exist in Adam Smith’s capitalism, but it didn’t really exist even in Ronald Reagan’s capitalism. This newfangled -- these gimmicks that were developed and spiraled wildly out of control were made possible because of that Commodity Futures Modernization Act, which Clinton signed and which said in Titles III and IV, no existing government regulation, no existing government regulatory body, will be allowed to supervise these credit default swaps, these collateralized debt obligations that were there.
And as a result, we had this wild runup of irresponsible mortgage lending. The banks no longer did, as in the old days, worry about whether you could make your payments, whether there was value in the house, because they weren’t going to hold that mortgage for thirty years like in the old days. They were going to sell it, you know? And that wild runup of the market—I call it the Clinton bubble. I think his administration deserves or should be given the main responsibility. And that is at the source of our problem. And this has not gone away. This is why we’re threatened with a possible 'nother steep decline, or we're threatened with a decade of Japanese-type stagnation. And the reason is because we now, taxpayers, are holding, you know, trillions of dollars of this stuff, these toxic investments. And as a result, housing right now is in a terrible state of affairs. There are 11 million homeowners that are underwater. They owe more on their mortgages than their houses. That translates to about 50 million people living in houses that are now worth less than what they owe on them, and they’re tempted to walk away from them. That’s why we don’t have any consumer demand. And it’s not just the people who are in trouble with their own houses, which is a tragic enough story, but even if somebody’s made every payment, even if they own their home outright. If you foreclose a house or two in that neighborhood, it brings everyone else down.