That and $700 Billion Will Buy You a Bailout

“This is a hole in the dike and it threatens to injure the safety and soundness of our banking system. It’s alarming to believe that the Fed, usually the great defender of the banking system, is now leading the deregulatory charge.”

And so, like Babe Ruth pointing the bat towards right field, Chuck Schumer — then a Brooklyn congressman — called the catastrophe that would unfold twenty years later.

The year was 1987, and the occasion was a major Federal Reserve vote that loosened Depression-era restrictions on banks — notably, allowing them to begin underwriting those mortgage-backed securities we’ve heard so much about lately. The 1933 Glass-Steagall Act wouldn’t fall for another dozen years, but this was the beginning of the end.

The Reaganomic argument of the day was that while FDR may have saved capitalism from itself, 1930s protections had been rendered quaint by 1980s conditions, that we needed to take off the leash so American financial oligopolies could compete with oligopolies overseas.

And besides, the Cassandras fearing unimaginable calamities like trillion-dollar bailouts had failed to recognize that the financial system was all grown up now. Thomas Theobald, vice chairman of Citicorp, offered three “outside checks” on market misbehavior:

  • “a very effective” SEC
  • knowledgeable investors
  • “very sophisticated” rating agencies

Give him credit — that’s three for three in naming the most cited failures underlying the current meltdown.

Missing from the conversation that long ago spring was any reference to Gordon Gekko or “Greed is Good,” but that’s only because of a technicality — Wall Street didn’t premiere until December. The movie’s tagline: “Every dream has a price.”

Bank Curb Eased in Volcker Defeat [NYT, May 1, 1987]

The Long Demise of Glass-Steagall [Frontline, 2003]

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