The Great American Stick-Up: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street

Editor's note: Excerpted from the book The Great American Stick-Up: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street, by Robert Scheer, by arrangement with Nation Books, a member of the Perseus Books Group.  Copyright © 2010.

Ronald Reagan called her his favorite economist, and Wendy Lee Gramm seemed to deserve the praise. Both while she was an academic economist and after Reagan appointed her to various regulatory positions in his administration, she excelled in articulating antiregulatory rhetoric that marked her as a true believer in what would later be labeled the “Reagan Revolution.”

Reagan himself had risen in politics after six years of tutelage as a spokesman for the General Electric Company, from 1954 to 1962. It was a time of conversion, as he described it, from being a “hemophiliac liberal” Hollywood actor to a cold-blooded Big Business conservative. Carrying the company’s banner, Reagan came to absorb the message that government regulation developed during the New Deal had become a chokehold on economic growth. Although as governor of California and later in the White House Reagan would preside over massive government budgets and even expand them, he found in Gramm an ideological “small government” soul mate. The Mercatus Center, an antiregulation think tank based at George Mason University from which Gramm has proselytized mightily, proudly boasts in her website biography that the Wall Street Journal “called her ‘The Margaret Thatcher of financial regulation.’”

However, unlike the former British prime minister, neither Gramm nor President Reagan was able to bring about much change in the balance between government and the private sector. While his administration did funnel hundreds of billions of dollars in new Cold War military spending to corporate contractors -- hugely expanding the national debt in the process -- Reagan was not able to deliver to Wall Street a parallel windfall.

For Wall Street, the holy grail was not cash handouts but a deconstruction of the complex public-private partnership ushered in by Franklin Roosevelt’s New Deal to restrain capitalism’s most self-destructive patterns. For these so-called FIRE firms -- Finance, Insurance, and Real Estate -- this half-century-old regulatory system, modest as it was, was an irritant that limited their ability to gamble and leverage their dominant positions.

While the companies just wanted to be free of restraint to profit at will, Reagan and Gramm were true believers, arguing that the regulatory status quo was outmoded and onerous -- even socialist -- hobbling business growth. The top target in their sights was the New Deal-enacted Glass-Steagall Act of 1933, signed into law by President Roosevelt, which regulated the financial services industry. Key to its effectiveness was the seemingly simple wall it erected between the commercial banks entrusted with depositors’ funds -- and insured by the government’s Federal Deposit Insurance Corporation (FDIC), the agency created by Glass-Steagall -- and the wilder antics of basically unregulated Wall Street investment banks like Goldman Sachs.

In 1982, Reagan signed the Garn-St. Germain Depository Institutional Act, easing regulation of savings and loans and, in the eyes of critics such as Paul Krugman, paving the way for the S&L collapse in the 1980s as well as the subprime housing crisis decades later. Nevertheless, Reagan made clear even then that this was not the biggest target on his list:

Unfortunately, this legislation does not deal with the important question of delivery of other services, including securities activities by banks and other depository institutions. But I’m advised that many in the Congress want to put this question at the top of the banking deregulatory agendas next year, and I would strongly endorse such an initiative and hope that at the same time, the Congress will consider other proposals for more comprehensive deregulation which the administration advanced during the 97^th Congress.