Financial Catastrophe: Here We Go Again

I mentioned earlier that I thought that looking at production and distribution of income was crucial to understanding the financial crisis. Of course, the financial side provided the tipping point.

Some thing similar happened a few decades ago with a war, a different Bush, and John McCain.

Many years ago, Lyndon Johnson, who would have just celebrated his hundredth birthday couple days ago, found himself stuck in a war he couldn't win. He also knew that if he raised taxes to pay for the war, the public would demand an immediate halt with an intensity that he could not resist. Johnson relied on borrowing, which raised interest rates.



Savings and loan institutions, like the investment banks today, borrowed short and lent long. In this case, people put their savings in the banks and the banks lent out money on 30 year mortgages. To prevent gouging and make mortgages affordable, the Savings and Loans were prevented from paying interest rates high enough to keep depositors from exiting, which could make them bankrupt.

The Reagan administration, including daddy Bush, moved to deregulate the Savings and Loans. Given this newfound freedom, crooks and nincompoops (including President Bush's younger brother) rushed in to take advantage of profiting from other people's money. As the scope of this disaster was becoming obvious, five senators, including John McCain along with Alan Greenspan (perhaps the Godfather of the recent financial crisis), rushed in to defend one of the more egregious Savings and Loan operations run by Charles Keating. Oh, yes, a small savings-and-loan in Arkansas, which was connected with Bill Clinton (who allowed Congress to deregulate the current financial system, led by Senator Phil Gramm, John McCain's chief economic adviser) also ran into difficulties.

The savings-and-loan scam crashed leaving the government to pick up the pieces at a cost that is still debated, but which was still well over $100 billion -- pocket change today.

The difference today is that our politicians will really do excellent regulation this time, just as they did with Sarbanes-Oxley in the wake of Enron.