Of Myths and Men: The GOP Trinity

There are few subjects more sacred to the Republican Party than Ronald Reagan and tax cuts.  On Real Time with Bill Maher last night, anti-tax lobbyist Grover Norquist refused to back down from his adoration of the Gipper, despite the fact that Reagan raised taxes seven times throughout his presidency.  Grover Norquist, at the behest of Reagan in 1985, founded the taxpayer advocacy group Americans for Tax Reform, whose guiding principle is the staunch opposition to raising taxes at any time.

An avid promoter of the ‘Starve the Beast’ strategy of the free-market fundamentalists of the Chicago School of Economics, Norquist is infamous for saying, “I don’t want to abolish government.  I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”  Advocates of Starve the Beast support decreasing tax revenues that fund government services, so that the government will run deficits that will require spending cuts to those services. The idea is that it is harder to pass legislation for spending cuts than it is to pass tax cuts…  So if you de-fund the revenue stream, you effectively de-fund the program.

Norquist is notorious for his Taxpayer Protection Pledge, an oath taken by politicians to never raise taxes under any circumstances.  The pledge has been embraced by the Republican Party, to the detriment of the recent debt ceiling negotiations.  Republicans took a hard-line stance on not passing a debt ceiling deal if any tax increases were part of the package.  However, it is hard to see how the GOP can claim the flag of fiscal conservatism when it advocates both deficit reduction and tax cuts simultaneously.  Back in the ’80s, Bush the First decried this myopic fiscal irresponsibility as “voodoo economics,” a moniker that should be re-claimed now in our current debate.

Voodoo economics, or ‘Reagonomics,’ is touted by Norquist and the GOP as holy scripture, despite evidence that it is destructive to broad-based economic growth.  They accept the ideology as a matter of fact, not faith, and worship Reagan as its ultimate icon…  But he is ultimately a false god.  The cult of personality built around Reagan is arguably one of the most destructive propaganda campaigns waged in politics today. In politics, as in religion, idol worship should be a forbidden sin.


Wonk Wednesday: Glass Steagall

Hello, dear readers, as of today I am rolling out a weekly educational series entitled “Wonk Wednesday,” wherein I will deliver to you the background on important financial concepts and institutions, bios on the relevant figures, and book reviews of classic and modern political and economic works.  I intend it to be informative, easily digestible, and perhaps a little humorous.  Too often, I read political or economic fare that is bogged down by arcane terminology and pedantic posturing…  That is to be avoided here.  With all of that said, laissez les bon temps rouler!  First up:  the Glass Steagall Act of 1933, often mentioned by Washington politicos and Occupy Wall Street protesters alike.

The Glass Steagall Act (GSA), financial reform legislation that emerged during the Great Depression as a safeguard to the highly speculative banking practices that led to the 1929 stock market crash, was written by Senator Carter Glass, who incidentally also authored the legislation creating the Federal Reserve system.  GSA built a firewall separating commercial and investment banking activities to eliminate the conflict of interest between the cultures of protection and risk.  This firewall was necessary because firms were becoming overly greedy and taking excessive risk with deposits, despite their fiduciary duty to act in the best interests of the investor.  Wall Street had become a casino where the players were betting with OPM– other people’s money inducing a powerful narcotic effect similar to opium…  Drugs are bad, kids!  House member Henry Steagall joined the regulatory party when the legislation was amended to include bank deposit insurance, i.e. the Federal Deposit Insurance Corporation (FDIC).

In 1956 Congress passed an extension to GSA called the Bank Holding Company Act to prevent large banking and insurance conglomerates from forming.  The rationale was that sound commercial banking practices precluded the high risks of underwriting insurance…  so banks were forbidden from underwriting insurance, but could still sell insurance products.  Again, remember:  the separation of protection and risk, avoiding conflicts of interest.

During the 1980s many efforts were made to curb and repeal Glass Steagall.  GSA rules were loosened by the Federal Reserve Board in 1986 to allow banks to engage in a small amount of securities trading.  In 1987 the Fed Board voted to allow a greater range of trading, against the wishes of Chairman Paul Volcker, using the free market argument that three system checks, namely the SEC, knowledgeable investors, and ratings agencies, were more effective regulators than prohibitive legislation.  Volcker thought that bankers would recklessly pursue higher rates of return, e.g. issue bad loans, at the expense of depositors.

The anti-regulatory argument was conveniently championed by none other than Alan Greenspan, a former director of J.P. Morgan and Volcker’s successor to the post of Fed Chairman.  Throughout the ’90s, Greenspan and the Fed further gutted the GSA at the behest of the banking industry.  In 1997 the Fed began allowing banks to own securities firms, and a series of high-profile mergers ensued.

In 1998 Sandy Weill of Travelers Insurance and John Reed of Citicorp sought to merge their insurance/securities underwriting and commercial banking businesses to create the world’s biggest financial services conglomerate, Citigroup.  Such a merger was exactly what Glass Steagall was intended to prevent.  Greenspan green-lighted the deal, with the understanding that the merger would have to conform to existing regulation, but in anticipation of the repeal of the GSA.  Bank lobbying went into overdrive, and in 1999 the Gramm-Leach-Bliley Act (aka the Financial Services Modernization Act) was passed, successfully repealing Glass Steagall and ushering in an era of bank industry consolidation.

So why is this all important?  The repeal of Glass Steagall provided the anti-regulatory framework allowing the risky securitization practices Volcker had feared and too-big-to-fail financial behemoths to emerge.  Banks engaged in predatory lending to secure more higher-interest, sub-prime loans for packaging into mortgage-backed securities which would then be sold as AAA investments.  Ratings agencies and the SEC aided and abetted this fraud.  Insurance companies such as AIG allowed multiple entities to insure the same asset in what is known as a Credit Default Swap (CDS).  Eventually Goldman Sachs realized it had such a huge stake in credit default swaps with AIG, that when the bubble burst, it would effectively bankrupt AIG.  Thus, Goldman began buying insurance against AIG’s collapse.  When the real estate bubble finally burst, bringing down home values as well as several venerable financial institutions like AIG Lehman Brothers, the economy tanked and the unemployment rate soared as companies, investors, and the American public scrambled for financial cover.

The American taxpayer has largely footed the bill for this disaster, as the government propped up institutions deemed ‘too big to fail.’  Perversely, as a result of the collapse, these institutions have become even bigger, and the conflict of interest between protection of assets and risk-taking of assets has grown exponentially.  The reinstatement of Glass Steagall is an important first step in righting our economic ship.  We must erect the firewall once again to eliminate the conflicts of interest that threaten our financial safety.  Though many disagree with Occupy Wall Street’s methodology, it is hard to argue against its motive of financial reform.

“Inside Job” Documentary

Hasta la Vista to the Hermanator

Herman Cain, the former Godfather’s Pizza CEO, Kansas City Federal Reserve Chairman, and Republican primary candidate for President, jokingly refers to himself as the “Hermanator” and “Black Walnut.”  His assertion that “stupid people are ruining America” and his admonition of the Wall Street Occupiers to blame themselves for their joblessness and poverty have engendered praise from many Tea Partiers and ridicule from most everyone else– conservatives and liberals alike.  Cain has shown a predilection for making bold statements and for the most part, not backing down from them.  This forthrightness has catapulted him to the front of the GOP presidential field.  Early in his run, he took a stand against the building of a mosque in Tennessee because he sees sharia law as a creeping threat to our government; and has also said that he would not nominate a Muslim to his cabinet.

On the October 16 Meet the Press with David Gregory, when asked about his immigration policy of building an electrified border fence, Cain claimed that he had been joking about electrocuting illegals and said that “America needs to get a sense of humor.”  However, he later told reporters in Arizona that he still believed a fence was necessary, and that “it might be electrified.”  Cain defended his lack of a clear-cut foreign policy by frequently re-iterating that he can’t build a foreign policy strategy until he has full intelligence briefings, and named Ambassador John Bolton, Henry Kissinger, and KT McFarland as his influences on the subject.  However, he was unaware as to the meaning of “neoconservative.”

When questioned about his controversial 9-9-9 tax reform plan, Cain repeatedly claimed that the majority of Americans would pay less because of the elimination of hidden taxes, although he could offer no proof thereof.  Gregory insisted that the rich would pay less and the poor would pay more according to the simple mathematics, but also cited the rebuttals of prominent economists.  Though Cain’s plan lacks credibility, its simplicity has garnered many fans.

A full-fledged believer in trickle-down economics, Cain thinks that America is on the track to socialism under Barack Obama, though Obama has governed far to the right of his party.  Under Obama, there have been no prosecutions of Wall Street financiers or government officials, relatively scant banking regulations, and no income tax increases on individuals or corporations.  The current president has, to his detriment, catered to Wall Street at the expense of Main Street.  If Cain thinks that America is headed for socialism, it’s hard to imagine what degree of free-market fundamentalism he espouses.  The real danger of Cain and his Tea Party brethren is the apparent ignorance to the pitfalls of unbridled capitalism and purist ideology.  Cain’s inflammatory socialist rhetoric against liberals serves him in riling up his base, but very well may be his downfall in the general election should he be his party’s nominee.  Polls consistently show that the majority of Americans favor consensus over polarization, hence old-guard establishment Republicans are wary of nominating a far-right candidate like Cain… so “Hasta la vista, Hermanator, and hasta manana, Mitt Romney.”