When Congress voted last week to bail out Wall Street banks and investment houses, members were also indirectly voting to repair damage lawmakers themselves had caused during a decades-long era of deregulation.
As the blame game moves into high gear in Washington, there seem to be few winners. Already under scrutiny are lawmakers from both political parties, Presidents George W. Bush, Bill Clinton and their predecessors, and record amounts of money funneled to Congress from Wall Street and the two government-backed mortgage giants, Fannie Mae and Freddie Mac.
In hindsight, members of Congress and administration officials such as Treasury Secretary Henry M. Paulson agree that a new regulatory framework must be created.
But investigating what went wrong and how to construct a new financial infrastructure confronts politicians and policymakers with an awkward situation. Many of those who will presumably shape new safeguards were advocates of the sweeping deregulation that contributed so much to the problems they now propose to fix.
The problem is particularly acute for members of the committees that oversee banking on Capitol Hill. “Congress deserved more blame than anyone else,” said Rep. Christopher Shays (R-Conn.), a member of the House Financial Services Committee who backed some deregulation bills but also called unsuccessfully for increased oversight.
Sen. Tom Coburn (R-Okla.), a conservative gadfly and the ranking GOP member of the Homeland Security and Governmental Affairs subcommittee on federal financial management, said lawmakers failed because they were too preoccupied with pleasing lobbyists, constituents and campaign contributors to fulfill their oversight responsibilities.
“How did we get here?” asked Sen. Byron Dorgan (D-N.D.). “In 1999, Congress was pressured to repeal the financial protections that were put in place following the Great Depression.”
Dorgan is one of a relative handful of members of Congress who have spoken out against the surge of deregulation.
Today, Rep. Henry Waxman (D-Los Angeles) is scheduled to hold the first of a series of hearings on what he described as “the regulatory mistakes and financial excesses that led to the market breakdowns on Wall Street.”
Among other potential targets of the inquiry: hedge funds and the credit rating agencies, which have been accused of attaching overly positive ratings to questionable mortgage securities.
Waxman said in a statement that he saw the problem as “a failure of the Bush Administration and the Republican-controlled Congress to oversee the markets.”
But others -- including Clinton -- insist that members of Congress from both parties should be held accountable. The two-term leader rapped Democrats last week for “resisting efforts by Republicans in Congress and by me when I was President” to tighten regulatory and accounting standards on Fannie Mae and Freddie Mac.
Republicans are now touting the role that their presidential nominee, Arizona Sen. John McCain, played in advocating stricter regulation of the mortgage giants.
The origins of the current problems lie in three overlapping areas, many critics say, though they often disagree on the order of importance.
The influence of money from special interests -- which flowed into congressional campaign coffers in huge streams -- is cited by some as a prime factor. Those groups and industries, which also funded massive lobbying campaigns, backed what some now see as ill-considered congressional votes that deregulated complex market activities and eventually brought the system to the brink. Others cite failures of the executive branch, including the White House and the Securities and Exchange Commission.
Exhibit A on the use of money to court decision-makers is the record of Fannie and Freddie.
Employees of both provided lavish campaign and other support to both parties through the years, but gave more overall to Democrats.
Current members of Congress have received a total of $4.8 million in donations from the mortgage guarantors, with Democrats collecting 57% of that, according to the Center for Responsive Politics.
Fannie and Freddie also paid huge fees to hire lobbyists to woo influential members of both parties. For example, Rick Davis, now a top advisor to McCain, was paid tens of thousands through the years by the mortgage giants.
When Democrats discuss the root causes of the financial crisis, they are likely to cite legislation from several years ago sponsored by former Sen. Phil Gramm, a Texas Republican who has served as an advisor to McCain.
Gramm successfully pushed a bill that deregulated banks and another that deregulated the so-called derivatives market, which has been blamed for fueling the current crisis.
Independent experts such as former SEC Chief Accountant Lynn Turner say that to understand the current crisis, it’s important to examine the full range of congressional actions that led to it, including the failure to heed warnings about Fannie and Freddie and the failure to oversee investment in the tangle of mortgage-backed securities, derivatives and swaps.
He also cites congressional and executive branch failure to respond to warnings about credit rating firms that gave unjustified high grades to risky mortgage-backed securities.
The role that deregulation played in the calamity is becoming the subject of heated debate. Conservatives argue the problems arose not from the fundamental decision to decrease the role of government but a failure of government -- including Congress -- to provide basic oversight and supervision.
Authors of a new book argue that it was reductions in the role of government advocated by both parties that played a major role in the financial meltdown.
“This is part of a pattern that emerged from a long period of reckless deregulation,” said Lawrence Jacobs, a University of Minnesota political scientist and co-author of “The Private Abuse of the Public Interest,” which examines the effect of a “deregulation fever” that gripped Democrats and Republicans near the end of the 1960s and persisted.
“There was an unquestioned assumption over these decades that if government stays out of the picture, the markets will be more dynamic and the outcome will be better for the country as a whole,” Jacobs said in an interview.
That proved to be the case in a few instances, such as the deregulation of commercial airlines. But, he added, “what started as a reasoned and nuanced discussion of how to nudge the economy forward turned into a kind of radical utopian stampede in which leaders of both parties said, ‘Government was the problem.’ ”
Republican Shays and other deregulation advocates counter that the problem lies not with deregulation but with the oversight that was always required of Congress and federal agencies.
Shays, for example, defends his vote for the Financial Modernization Act. That law stripped the Depression-era regulation of banks and allowed them to engage in investment activities.
But he also has been critical of the Treasury Department and other agencies for not overseeing what followed.
North Dakota’s Dorgan, a Democrat, takes a harsher view. He faults the decision to deregulate banks that occurred after passage of the modernization act.
“In 1999, when the bill was debated, I warned, ‘This bill will also raise the likelihood of future massive taxpayer bailouts.’ . . . I also think we will, in 10 years time, look back and say, ‘We forgot the lessons of the past,’ ” Dorgan said, adding, “I take no satisfaction that I was right.”
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Asian stocks plunge
Asian stock markets fell this morning as investors took scant comfort from Washington’s passage of a $700-billion bank bailout and focused instead on deepening financial turmoil in Europe that threatens to slow global growth.
Japan’s benchmark Nikkei 225 average was down 4.4% , while Hong Kong’s Hang Seng index slid 3.7%. Markets in mainland China, Australia, South Korea, Singapore and Thailand also fell sharply. Indonesia’s key index plunged more than 5%.
From the Associated Press