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January 08, 2009

Dramatic action by government required

Twenty-eight years ago, an incoming president said,
PRESIDENT RONALD W. REAGAN (1st Inaugural Address, January 20, 1981): The economic ills we suffer have come upon us over several decades. They will not go away in days, weeks, or months, but they will go away. They will go away because we as Americans have the capacity now, as we've had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom.

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.
I would mark the turning point that began the current crisis to that moment, the day President Reagan took office. The Reagan years were marked by unbridled fraud and criminality. The realm of regulated capitalism within which the economy had operated for about five decades was whittled down under the Reagan "government is the problem" mantra. Within a couple of years Reagan would sign de-regulatory legislation that foreshadowed the mess we have today:

Remarks on Signing the Garn-St Germain Depository Institutions Act of 1982
October 15, 1982
PRESIDENT RONALD W. REAGAN: Thank you all very much, and thank you for joining us to sign this historic reform. This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. It's proconsumer, granting small savers greater access to loans, a higher return on their savings. And when combined with recent sharp declines in interest rates, it means help for housing, more jobs, and new growth for the economy. All in all, I think we hit the jackpot. [emphasis added]

...

Now, this bill also represents the first step in our administration's comprehensive program of financial deregulation. I particularly want to commend the leadership of the chairman, Senator Garn, and Chairman St Germain, along with Secretary Regan and his fine team at Treasury. They did a remarkable job forging a consensus within the Congress and among affected industries in favor of the bill's deregulatory provisions. I'd like to also thank Congressmen Stanton, Wylie, and LaFalce for their assistance.

What this legislation does is expand the powers of thrift institutions by permitting the industry to make commercial loans and increase their consumer lending. It reduces their exposure to changes in the housing market and in interest rate levels. This in turn will make the thrift industry a stronger, more effective force in financing housing for millions of Americans in the years to come.

Unfortunately, this legislation does not deal with the important question of delivery of other financial 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 agenda 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 97th Congress.

Thank you all again. I'm very pleased to sign this Garn-St Germain Depository Institutions Act of 1982.

Note: The President spoke at 11:03 a.m. at the signing ceremony in the Rose Garden at the White House.

As enacted, H.R. 6267 is Public Law 97 - 320, approved October 15.
What followed was the worst decade of financial fraud in the nation's history, up to the early 1990s, known as the Savings and Loan scandal. The government backed by the taxpayer had to pony up $500 billion to clean up the mess.

Today, $500 billion is a drop in the bucket compared to what continued de-regulation has wrought in the Clinton and Bush years that have followed. Reagan's "banking deregulatory agenda" had to wait for the waning days of the Clinton Administration for enactment, as the depression era Glass-Steagall Act was repealed and the Commodity Futures Modernization Act of 2000 ushered in the dark financial schemes of the last eight years.

So far, the bill for the current fraud could cost taxpayers several trillion dollars.

President-elect Barack H. Obama today struck some of the right notes in his speech on "Dramatic Action" for American Recovery and Reinvestment:
PRESIDENT-ELECT BARACK H. OBAMA (January 8, 2009): This crisis did not happen solely by some accident of history or normal turn of the business cycle, and we won?t get out of it by simply waiting for a better day to come, or relying on the worn-out dogmas of the past. We arrived at this point due to an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, DC. For years, too many Wall Street executives made imprudent and dangerous decisions, seeking profits with too little regard for risk, too little regulatory scrutiny, and too little accountability. Banks made loans without concern for whether borrowers could repay them, and some borrowers took advantage of cheap credit to take on debt they couldn?t afford. Politicians spent taxpayer money without wisdom or discipline, and too often focused on scoring political points instead of the problems they were sent here to solve. The result has been a devastating loss of trust and confidence in our economy, our financial markets, and our government.

Now, the very fact that this crisis is largely of our own making means that it is not beyond our ability to solve. Our problems are rooted in past mistakes, not our capacity for future greatness. It will take time, perhaps many years, but we can rebuild that lost trust and confidence. We can restore opportunity and prosperity. ...

There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy ? where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit. [emphasis added]

That is why we need to act boldly and act now to reverse these cycles. That?s why we need to put money in the pockets of the American people, create new jobs, and invest in our future. That?s why we need to re-start the flow of credit and restore the rules of the road that will ensure a crisis like this never happens again.
Only govenernment can do this. That means us pulling together, as we both pay into what we can afford and receive what we need from the public resource. Is this the end of the Reagan-era shattering of government trust? Obviously, big capital would be finished after the collapse of 2008 without massive public intervention and guarantees. So proof positive of how terribly wrong Reagan was is at hand.

But our job is to make sure that we hold Obama to making that intervention a re-invigoration of public assets and not a drinking of the last public blood of the empire by self-starved financial vampires.

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