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

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.

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Reagan’s timeline, however, was overly optimistic; economic problems, particularly the savings and loan meltdown and the spiraling national debt, made politicians of both parties cautious. Yet, in one of the grand twists of American politics, the proposals he sought would eventually be signed into law more than a decade later by a Democratic president with a reputation of being a liberal child of the 1960s. In fact, at the end of Reagan’s presidency, Congress passed legislation that toughened rather than weakened financial industry regulation. As Time magazine reported on August 17, 1987:

Ronald Reagan’s dream of carrying out a sweeping deregulation of the US economy has stirred a powerful backlash on Capitol Hill. Never has that been more apparent than last week, when Congress passed its first comprehensive piece of banking legislation since 1982. The White House had hoped the bill would remove many of the governmental shackles that inhibit competition between banks, securities firms and other institutions in the burgeoning field of financial services. In fact, it does just the opposite.

Reagan signed the bill, the Competitive Equality Banking Act of 1987, only after criticizing it for not only failing to tear down the Glass-Steagall walls but, worse, temporarily extending “the 1933 Glass-Steagall Act restrictions on securities activities to state-chartered, non-member banks for the first time.” He made it clear he was signing the bill despite his quite vociferous objections because it contained provisions for funding for local banks in trouble. It was at once a statement of the enormous importance he attached to decimating Glass-Steagall and an admission that he would come to the end of his last term without accomplishing that goal.

So legislatively his administration was a bust when it came to reversing the New Deal. Yet rhetorically it was an enormous success in propagandizing a view that so-called big government was the cause of America’s late-twentieth-century crisis of economic confidence. He managed to popularize and make palatable the heretofore fringe belief that government regulation of the financial sector, rather than saving capitalism from itself, was an irrational hindrance to individual profit and even a threat to our national power. Speaking at the signing of the 1987 bill, Reagan noted, “These new anti-consumer and anti-competitive provisions could hold back a vital service industry at a time when competition in the international capital markets increasingly challenges United States financial institutions, and they should be repealed.”

With great political irony, this speech would be repeated almost word for word a dozen years later, when Democrat Bill Clinton reversed a half century of his party’s core economic principles to argue for the repeal of Glass-Steagall. Clinton’s public rationale for this watershed shift was that if regulation of Wall Street were not “modernized” -- political code for weakened or eliminated -- the United States would lose out to foreign competition in capital markets.

Much of the groundwork for Clinton’s break was laid by the diligent Republican Wendy Lee Gramm and her husband, Senator Phil Gramm, also a Texas Republican. The high priestess and priest of financial deregulation met at a conference in New York, where Wendy Lee, a PhD student in economics, was interviewing with Phil Gramm for a position at Texas A&M University, where he was a senior professor. Wendy Gramm would later tell interviewers that as Professor Gramm was helping her on with her coat at the interview’s conclusion, he expressed interest in dating her if she came to Texas. She told the New York Times her response to him was “Oh, yuck,” but Gramm persisted, and six weeks after she arrived on campus, they wed.

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