Dont blame GOP for this mess |

Dont blame GOP for this mess

John A. ValerskyVail, CO,

Mr. David Le Vine: n Hoover most certainly did not ignore the problems. Hoover (contrary to his fundamental beliefs) took action. Unfortunately, as explained in Amity Schlaes The Forgotten Man, Hoover by intervening in business, signing into law a destructive tariff, and by assailing the stockmarket did damage on all three fronts. You also are apparently unaware of the massive public projects at federal and state level that Hoover pushed for as part of his program to retain employment and high wages. The Republicans did not have a program of doing nothing as you stated.n The Republicans do have an alternative budget. They did not, as you state, offer nothing. The main points may be found at I leave it up to you as to whether you read the full document. If you are like many of our representatives, who I expected to read and understand bills on my behalf, you will not, as they did with the stimulus bill. I would like all our representatives, by the way, to provide an affidavit swearing that they read and understood the Obama stimulus bill before they voted for it. I doubt many will do so.n As for the blame in the case of the financial crisis, I have spent the better part of the last two years doing little else but researching the basic data trying to understand how we got to this point. Without doubt the causes of this crisis stretch back into the seventies and involve both parties, many administrations, congress , government agencies and well as financial institutions, mortgage companies, brokers, appraisers, financial ratings firms, and others. The causes are complex, much like the many rivulets that form tributaries which in turn feed what eventually becomes a raging powerful river. Housing, for example, is but one — a tributary, I think. Heres a bit simply to illustrate the complexities:n Housing and mortgage elements first appeared at the end of the Clinton administration, for example (here I rely on the work done by Yales economics professor Shiller, who has gained quite a following as one who correctly predicted both the technical and housing bubbles). I do not imply that Bill Clinton bears major responsibility for the housing bubble. What is inescapable is that certain actions during his administration contributed to the beginnings of the housing bubble. n Presidents Clinton and Bush, and Congress, especially the Democrats and within the Democrats — the Black Caucus — pushed well-meant but poorly thought-out efforts that were central to creating and exacerbating the housing-mortgage bubble. Both Bush and Clinton looked for ways to extend home ownership. But what followed quickly was rise of ARMs, interest-only loans, liar loans, and other financial sleight-of-hand. n Other major tributaries included the criminal mismanagement of Fannie Mae and Freddie Mac, which not only exacerbated the housing bubblebut also the sub-prime crisis, abetted by what I consider unconscionable efforts by certain Democratic members of Congress to impede any real regulatory oversight over these entities. These are documented both in the text of the hearings and the visual recordings available at times on the Web. The efforts (to set in place regulatory controls) disingenuously boasted about by Barney Frank in 2008 were simply those that John Sununu, Chuck Hagel, and Elizabeth Dole, all Republicans, tried to implement earlier (beginning in 2003 with S1508) when they would have had a chance of success.n Meanwhile development of leveraged investment devices commonly referred to as derivatives, which had begun as a small tributary, became an incredibly fast flowing and powerful river in itself. In 1973, Fisher Black and Myron Scholes published a famous paper entitled The Pricing of Options and Corporate Liabilities. This paper explained how they derived and solved the Black-Scholes-Merton differential equation, solving a longstanding stock-option pricing problem — known afterward as the celebrated Black-Scholes formula (Black left academic life in 1984 to become a partner of Goldman, Sachs & Co.). A number of firms like J.P. Morgan developed financial devices in the 1990s to sell debt associated with securitized mortgages based on their ideas. These began the explosion in liquidity and leverages. The devices are also known as LCDS (loan credit default swaps), CDS of CDOs (credit default swaps of collateralized debt obligations), CFDs (contracts of difference). Basically they are means of placing bets on movements in the markets. The way was open to the floodgates of speculation. But for many years — indeed since 1933, a measure of protection existed in the form of the Glass-Steagall Act. This act separated speculative investment institutions from the traditional banks.n Robert Rubin (who headed Bill Clintons National Economic Council, then served as Clintons treasury secretary) pushed to break down the barriers between the traditional bank and the investment institutions. While treasury secretary, Rubin sought the repeal of the 1933 Glass-Steagall Act, which as noted had separated largely unregulated and more speculative investment banks like Goldman Sachs from government-supervised and -insured commercial banks like Citi, which play a key role in the nations monetary policy. Glass-Steagall was designed to prevent the kinds of speculative conflicts of interests that pervaded Wall Street in the 1920s and helped bring about the Great Depression. Congress formally repealed Glass-Steagall, in November 1999, by an act termed in some circles the Citigroup Authorization Act. Rubin had stepped down as treasury secretary that July. His new job, announced in late October of that year, was chairman of Citis executive committee. Rubins initial annual compensation was around $40 million. n Rubins links with the current administration are very strong. Although he ceased his personal fund-raising activities for political candidates, he remained very close to others in the Wall Street Democratic money machine, and to its party conduits, particularly Sen. Chuck Schumer, who headed the Democratic Senate Campaign Committee, and then Rep. Rahm Emanuel, Schumers House counterpart in the 2006 campaign, now Obamas chief of staff. n Rubin enjoyed such privileged status among Democrats that when the Democrats took back the House in 2006, incoming Speaker Nancy Pelosi advised the new Democratic caucus that its first two briefings would include one on defense, with three experts of differing views. On the economy, Robert Rubin would be appearing, solo. After Obamas election, the president-elect chose as his top economic advisers Timothy Geithner as treasury secretary, Lawrence Summers as senior White House economics adviser, and Peter Orszag as budget director — all of whom are past proteges of Rubin. Even the headhunters for Obama have Rubin ties: Michael Froman, Rubins chief of staff in the Treasury Department, who followed him to Citigroup; and James Rubin, Rubins son. On Jan. 9, Citigroup announced his resignation, after having been criticized for his performance. He received more than $126 million (I could be off a few million here and there) in cash and stock during his eight years at Citigroup. I am sure you are aware of the costs to the taxpayer stemming from bailout funds paid to this firm.n I do not have a conclusion as yet. I suspect that hidden in all the other actions, such as those described above, the slow loss of well-paying skilled worker and lower-to-middle management jobs as our industrial base shrank and service-related jobs began to dominate the economy may be key to understanding our present situation. I think there is enough blame to go around. But understanding of the facts are important if we are to understand the origins of this crisis and to develop reasoned approaches to solving the crisis. John A. Valersky

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