The bipartisan deregulators

LIKE EVERYTHING else in Washington--from the Iraq war to the USA PATRIOT Act--the financial crisis that has already brought down a host of blue-chip Wall Street firms is a bipartisan disaster.

You're not likely to hear much about that, though, because those on the Republican side who are associated with the catastrophe are cardboard cut-out villains--like former Sen. Phil Gramm, one of John McCain's top advisers, who was banished from public view when he was caught on tape denying the reality of the U.S. recession and saying that America has become a "nation of whiners."

As the longtime chair of the Senate Banking Committee when the Republicans ran Congress, Gramm pushed through dozens of measures deregulating the banking and finance industries. He spearheaded legalization of the financial shenanigans that led to the rise and fall of Enron, and now the same measures threaten to topple Wall Street.

The Democrats would like to keep the focus on characters like Gramm and the lobbyists running McCain's campaign. And no wonder--because the Democrats were the Republicans' chief accomplices.

Because the U.S. has two major capitalist parties, each does what Corporate America wants. And high on the capitalist wish list for the past three decades has been the abandonment of government regulation across broad swaths of the economy.

In fact, the Democratic administration of Jimmy Carter kicked off the deregulation revolution with the lifting of government restrictions on airlines, trucking and railroads.

Airline deregulation--sold as a pro-consumer measure (ask someone who's flown recently how much they liked the experience or the ticket price!)--was the congressional cause célèbre of arch-liberal Sen. Ted Kennedy. Kennedy's then-aide, now pro-business Supreme Court Justice Stephen Breyer, who helped design the law that tore up federal rules governing airline pricing and routes.

During the presidencies of Ronald Reagan and George H.W. Bush, the energy sector (including oil and gas) was deregulated, with Democrats in Congress providing the legislation that accomplished these goals.

But the Democratic Clinton administration almost outdid its two Republican predecessors.

The Clinton White House's pro-business policies went further than simple "deficit reduction." Clinton and his treasury secretaries Lloyd Bentsen, Robert Rubin and Larry Summers allowed conservative Federal Reserve Chair Alan Greenspan a free hand to jack up short-term interest rates at any hint of inflation, real or imagined.

Although the Clinton Justice Department pursued a much-publicized antitrust action against Microsoft, the administration meanwhile actively encouraged deregulation and monopolization in the military (through successive Pentagon budgets), telecommunications (the Telecommunications Act of 1996) and finance (the Financial Services Modernization Act of 1999) industries.

THIS LAST bill is the one that's most directly responsible for the current disaster facing the financial industry. Though spearheaded by Gramm and Republican Rep. Jim Leach--the same Leach who recently made news by endorsing and speaking for Barack Obama at the Democratic Convention in Denver (bipartisanship abides!)--banking "modernization" was a longtime goal of the Clinton administration.

In fact, Clinton and his economics brain trust signaled their support for banking deregulation as early as December 1992 at the "economic summit" Clinton held in Little Rock, Ark., in the month before he took office. As James Ridgeway points out in a very useful (and prescient) article in Mother Jones, the conservative National Review noted that Clinton embraced "at least one Reaganesque idea" at the Little Rock summit: "banking deregulation."

The finance industry's goal was to repeal the Glass-Steagall Act, the New Deal-era law that erected barriers between commercial and investment banking, and prohibited banks from hawking investment and insurance products. The Financial Services Modernization Act accomplished this, retroactively legalizing 1990s mergers in financial services that had pushed the envelope of what was legal under Glass-Steagall.

Although initial support for the bill fell along traditional party lines (Republicans for, Democrats mostly against), Republican leaders in Congress, working with Clinton's Treasury Secretary Robert Rubin, made a few concessions to Democratic concerns and won final passage of the bill with bipartisan veto-proof majorities.

While the Democrats congratulated themselves for winning provisions protecting consumer privacy and preserving regulations encouraging non-discrimination in bank loans, the banking industry walked away with the big prize.

For Wall Street, agreeing to continue making loans in low-income neighborhoods was chump change for getting what it really wanted--the abolition of Glass-Steagall and an open door to mergers and business expansion to create firms that do everything from take deposits to make mortgages to sell insurance and to pitch investments.

The best example of the kind of mega-firm that the 1999 law made possible is Citigroup. Not coincidentally, Citigroup hired Rubin for the multimillion-dollar position as director and chair of the executive committee. More importantly, the 1999 law led to the creation of "too big to fail" entities whose losses or bad decisions in one area (say, mortgage-backed securities) could contaminate other areas.

Where is Rubin now? While lobbying his friends in the federal government to help the finance industry with a huge bailout, Rubin is serving as a high-level economic adviser to Barack Obama. Many of Rubin's acolytes also serve as top Obama advisers.

Thus, while Obama has talked about wanting stronger regulation of the finance industry and has scored points against McCain for his connections to the likes of Gramm, he isn't pointing the finger at Rubin.

Obama has been the favorite of the "finance, insurance and real estate" industry, according to the Center for Responsive Politics. Because the industry is expecting something in return for its investment, it will be telling to see how Obama positions himself in the congressional debate (if there is one) on the $700 billion bailout that Treasury Secretary Henry Paulson proposed.

At first, a chorus of leading Democrats lined up to support the bailout plan--including House Speaker Nancy Pelosi and Senate Banking Committee Chair Charles Schumer--and echoed the financial industry's demand that no conditions or regulations be placed on financial firms in line to receive billions in taxpayer dollars.

This isn't surprising for someone like Schumer, who has long been known as Wall Street's gofer in Congress. But other Democrats, including the House Financial Services Chair Barney Frank, are demanding that the bailout bill include some relief to homeowners facing foreclosure as well as changes to executive compensation.

With so many Americans losing their houses and jobs, it's politically untenable for the Congress to simply hand over a blank check to Wall Street. So Democrats might be able to demand "concessions."

If so, we should recall what happened in 1999. Democrats may win some token changes that allow them to claim that they stood up for ordinary Americans. But the Wall Street wizards who will reap the bailout benefits will know better--and they'll be laughing all the way to the bank.