Ten years ago, after making piles of money gambling with other people’s money, Wall Street nearly imploded, and the outgoing George W. Bush and incoming Obama administrations bailed out the bankers.
America should have learned three big lessons from the crisis. We didn’t, to our continuing peril.
First unlearned lesson: Banking is a risky business with huge upsides for the few who gamble in it, but bigger downsides for the public when those bets go bad.
Which means that safeguards are necessary. The safeguards created after Wall Street’s 1929 crash worked for over four decades. They made banking boring.
But starting in the 1980’s, they were watered down or repealed because of Wall Street’s increasing thirst for profits and its growing political clout. As politicians from both parties grew dependent on the Street for campaign funding, the rush to deregulate turned into a stampede.
It began in 1982 when Congress and the Reagan administration deregulated savings and loan banks – allowing them to engage in risky commercial lending, while continuing to guarantee them against major losses.
Not surprisingly, the banks got into big trouble, necessitating a taxpayer-funded bailout.
The next milestone came in 1999, when Congress and the Clinton Administration, under then Treasury Secretary Robert Rubin, repealed the Glass-Steagall Act – a 1930’s safeguard that had prohibited banks from gambling with commercial deposits. (For the record, I was no longer in the Cabinet.)
Then in 2000, Congress and Clinton barred the Commodity Futures Trading Commission from regulating most over-the-counter derivative contracts, including credit default swaps.
The coup de grace came in 2004, when George W. Bush’s Securities and Exchange Commission allowed investment banks to hold less capital in reserve.
All of this ushered in the 2008 near meltdown – which was followed by another attempt to impose safeguards, the Dodd-Frank Act of 2010.
