Important Info: The Financial Meltdown & Politics

As I have written earlier, writing about politics, political matters or the election is NOT my favorite topic. However, as an American I can't ignore what has happened with our financial markets in the past week.

I am an average, middle-class American. (If there still is a middle-class in America!) I spent more than 25 years working for two of - what used to be - the Big 3 American Auto Companies. Since September of last year, I have been self-employed as a free-lance writer. I have dabbled a bit in the stock market. My 401k has lost a little better than 50% of its value during the past 12 months or so. I also have an IRA which has lost 25% of its value during the same period. Since I am not a political or market expert, when our financial markets went south, I wanted to know HOW this could happen? Historically, I knew that after the stock market crash of 1929 and the depression that followed this crash, laws and regulations were passed to put checks and balances into our marketing system to prevent a similar disaster in the future. So, what happened?

I started surfing the news show pundits while doing my own research on the Internet. I found lots of information and "finger-pointing" as to who and what caused our current crisis. Democrats are blaming Republicans. Republicans are blaming Democrats. CEOs are leaving their bankrupt companies with millions of dollars in separation packages. Taxpayers are bailing out AIG to the tune of $85 billion. Gas is above $4 a gallon. Millions of regular citizens are in financial crisis. Millions more are barely getting by from paycheck to paycheck. Home foreclosures are at an all time high.

All of this did not happen overnight. Although there are many people and circumstances to blame for our financial markets failing, in my research I found one recurring reason - the deregulation of our financial markets.

In December of 2000, Congress passed the Commodity Futures Modernization Act. Senator Phil Gramm (R) of Texas was able to attach this act to a $384 billion spending bill. Most in Congress never read this 262-page document.
David Corn, Mother Jones' Washington DC Bureau Chief, wrote:
"It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the SEC nor the Commodity Futures Trading Commission (CFTC) got into the business of regulating new fangled financial products called swaps—and would thus 'protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century.'"

Did you read that right? The act "would ensure neither the SEC nor the CFTC got into the business of regulating new-fangled financial products called swaps - and thus would 'protect financial institutions from over regulation.'" With this act, Congress approved deregulation put in place after the crash of the stock market in 1929. This act was the start of the road to the financial disaster we are seeing now.

Yesterday, Andy Serwer and Allan Sloan, posted a great, easily understandable article, "How Financial Madness Overtook Wall Street", for Time.com.
"In normal times, problems in the economy cause problems in the financial markets because hard-pressed consumers and businesses have trouble repaying their loans. But this time — for the first time since the Great Depression — problems in the financial markets are slowing the economy rather than the other way around. . . Fear is so pervasive today because for years the financial markets — and many borrowers — showed no fear at all. Wall Streeters didn't have to worry about regulation, which was in disrepute, and they didn't worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products — derivatives like credit-default swaps."

Oh wait, there's that same word again, "swaps." The act passed by Congress in December of 2000 took away the regulation of "new fangled financial products" and the Times article states "Wall Streeters didn't have to worry about regulation . . . they didn't worry about risk which had supposedly been magically been whisked away by all sorts of spiffy nouveau products."

Don't understand derivatives like credit-default swaps? It's okay. Apparently no one on Wall Street did either. When borrowing was easy and the return was good, companies could borrow many times over their actual worth. If their investments showed any return, they made big money. But, as the market went south, the return fell also, and credit tightened, meaning these big companies, like Lehman, had to put up more collateral, which because of surviving on borrowed money (ie. high risk mortgages) they didn't have. No one was watching as these companies' liabilities started to far exceed their worth. The Feds and the SEC didn't have the power to regulate what was going on with these companies. Hence, the mess we are in today.

On May 27, 2008, Jonathan Larsen with Keith Olbermann of MSNBC wrote:
"Some economists fault Gramm’s deregulatory successes, as well as lax enforcement of remaining oversight powers, not just for the subprime mortgage crisis, but for its spread to other sectors of finance. Even Treasury Secretary Henry Paulson has expressed interest in toughening regulations."

In the midst of this political campaign, this situation gets much worse. In 2002, Gramm became Vice-President of Swiss Bank UBS and in 2004 he registered as a lobbyist for UBS to specifically lobby for legislation dealing with our mortgage crisis. In April of this year, UBS removed him as a registered lobbyist. He remains Vice-President. Until July of this year, Gramm was the lead financial advisor to Senator John McCain. McCain, in the Wall Street Journal, referred to Phil Gramm as his "financial guru."

In February of this year, an article on CNN.money said:
"McCain's chief economic adviser - and perhaps his closest political friend - is the ultimate pure play in free market faith, former Texas Senator Phil Gramm."

McCain and Gramm promote less government and free trade. Conceptually both sound like good ideas, but our economy is too big and far too important to be unregulated. Gramm's legislation was the beginning of the end for our financial markets by deregulating them. To add insult to injury, our Congress passed this legislation.

In July of this year, Gramm resigned from the McCain campaign. On July 18, 2008 FoxNews.com wrote:
"Former U.S. Sen. Phil Gramm, a top adviser to John McCain, resigned Friday from McCain’s presidential campaign after he was criticized recently for describing America as a 'nation of whiners' and as suffering from a 'mental recession.' . . . Gramm, a Texan who now is the No. 2 at the Swiss bank UBS, told The Washington Times last week the United States has benefited from globalization but most Americans are misguided by constant reports that the economy is at its worst in 30 years."

Did he say "Americans are misguided?" Look at where we are today, two months later. Is there any wonder why John McCain thinks the fundamentals of our economy are still strong? I don't want to point fingers - nor do I wish to make this a partisan blog. I don't like to write about government or politics. I can only hope McCain is no longer taking financial advice about the U.S. economy from Phil Gramm and that his current fiscal plans for this country were not written by Phil Gramm.

Below are the links to all of my quotes and sources in the order they were referenced. There is some really good information here - but, don't take my word for it, or theirs, do your own research and make your own decisions.

Read the entire "Explanation for the Current Financial Crisis" article David Corn here: http://www.supertopo.com/climbing/thread.html?topic_id=678164&tn=0

Read the entire September 8, 2008 Time.com article, "How Financial Madness Overtook Wall Street" by Andy Serwer and Allan Sloan here: http://www.time.com/time/business/article/0,8599,1842123-1,00.html

Read the entire May 27, 2008, MSNBC article, "McCain Economic Policy Shaped by Lobbyist" by Jonathan Larsen with Keith Olbermann here: http://www.msnbc.msn.com/id/24844889/

Read the entire February 19, 2008 CNN.Money article, "McCain's Econ Brain" by Shaun Tully here: http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm?postversion=2008021917

Read the entire July 18, 2008 FoxNews.com article, "Gramm Leaves McCain Campaign Over 'Whiners' Comments" by FOXNews here: http://elections.foxnews.com/2008/07/18/gramm-leaves-mccain-campaign-over-whiners-comments/