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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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His bold self-confidence might have helped carry the duo as apostles of an unabashedly Big Business creed then increasingly gaining currency in academic economic circles and within both political parties. Back in 1976, in fact, Jimmy Carter, now known mostly for his postpresidency activism on behalf of Third World democracy, Middle East peace, and ending poverty in America, was a strong advocate of business deregulation. As Georgia’s governor, Carter had been a fiscal conservative who, in the tradition of conservative Southern Democrats, shunned Northern liberalism.

Phil Gramm, too, came out of that tradition. After obtaining his doctorate in economics from the University of Georgia in 1967, the year after Carter lost his first bid to be that state’s governor, Gramm moved on to Texas A&M and taught economics for twelve years before jumping into politics. Gramm was elected to Congress as a Democrat in 1978; just three years later, he would become the epitome of a “Reagan Democrat” by cosponsoring the Gramm-Latta budget that implemented Reagan’s economic program. Proudly, at his retirement from the Senate, Gramm cooed, “in 1981, I wrote the first Reagan budget.” Gramm then abruptly resigned from the U.S. House of Representatives on February 12, 1983, forcing a special election for his seat, and the next month was elected to that seat as a Republican. After serving a third term, he completed his meteoric rise by being elected to the Senate in 1984. Until he retired, he would prove to be arguably the most influential Republican on financial issues.

As chair of the Senate’s Banking, Housing, and Urban Affairs Committee from 1995 to 2000, he was in a position, with Clinton’s support, to finally make Reagan’s commitment to radical deregulation of the financial markets a reality. This was accomplished with two signature pieces of legislation that he -- surely more than anyone else -- was responsible for putting into the law books: the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000.

Certainly there were many other legislators and bureaucrats pushing for what was euphemistically called “banking reform.” By now the FIRE industries were pumping hundreds of millions of dollars into each major election cycle to lobby both parties to support the reversal of Glass-Steagall’s regulatory provisions and similar regulations, and so they had plenty of eager helpers. With union membership on the decline in America, Democrats decided they no longer could let Wall Street money flow in such unequal measure to Republicans; under Clinton’s lead, the floodgates of campaign payola were now fully bipartisan.

Senator Gramm’s committee status and long-term persistence on the matter, however, gave him alpha status: The legislation that finally would reverse the venerable Glass- Steagall laws would carry his name first: the Gramm-Leach-Bliley Act, which would be signed into law as the Financial Services Modernization Act of 1999. However, some years before Glass-Steagall was dismantled, Phil’s wife played a key role, as a member of both the Reagan and the Bush I administrations, in shaping the rapid changes in the financial markets brought about by internationalization, computer-driven trading, and the introduction of a whole new discipline of “risk management,” whereby Wall Street wizards deployed complex mathematical models to create a vast array of new financial products, such as the now infamous credit default swaps and collateralized debt obligations.

As was seen throughout the Reagan and later the Bush I and Bush II administrations, the Republicans had realized they could impose de facto deregulation of Big Business by appointing to influential federal commissions and agencies “watchdogs” who were sympathetic to the corporations they were supposed to be monitoring. Of course, this end run around congressional authority was probably not as satisfying or foolproof as wiping out the regulation altogether, yet it proved quite effective in pleasing CEOs, who had spent the 1970s complaining about red tape and overzealous government investigators.

 
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