“It was the economy, stupid.”
The phrase — first coined during Bill Clinton’s 1992 presidential campaign to explain the recession — serves as the introductory chapter in Robert Scheer’s latest book, “The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street.”
You’d have to be living under a rock to have missed the country’s most recent financial crisis, officially labeled a recession that lasted from December 2007 to June 2009. But less is known about the causes of the meltdown. Even President George W. Bush asked his Treasury Secretary Henry Paulson: “How did this happen?”
Scheer’s book attempts to set the record straight, and says that while Bush didn’t create this crisis, but he did little to stop it.
Nor was responsibility in the hands of President Barack Obama, who inherited the mess with his election, Scheer says.
He writes that the recession was cooked up under the Reagan and Clinton administrations through the deregulation of banking systems and financial institutions.
Deregulation came in many forms. One of the first steps was the dismantling of the Glass-Steagall Act, which was implemented after the Great Depression to create a barrier between Wall Street investment banks and depository banks. The act “was designed to protect the savings and the loans of average-Joe clients of commercial banks by shielding them from the gambling shenanigans of high-flying investment banks,” Scheer writes.
Under President Clinton, then-Sen. Phil Gramm (R-Texas) successfully pushed for the act’s repeal and the creation of mega-organizations such as Citigroup Inc., which combined commercial and investment banking. Scheer suggests the repeal helped foster a financial bubble that burst ten years later, leaving the government and taxpayers to pick up the tab.
Although it’s difficult to imagine how an act that worked well for 70 years could be repealed so easily, Scheer paints a convincing picture. Many of the people behind the deregulation efforts previously worked, or went on to work, for the companies that would benefit from such a change. And they cleverly packaged the repeal as a “modernization effort.” Who could say no to that?
Scheer’s journalism background is obvious throughout the book. He continually asserts that deregulation was a bipartisan effort and no single political party is to blame. He is quick to point out that Goldman Sachs & Co. alums “were no less prominent in the Obama administration than had been the case with his Republican predecessor.”
The most relevant part of book comes toward the end, when Scheer highlights the people who got us into this mess who are still in the driver’s seat. A prime example is Robert Rubin, a former co-chairman of Goldman Sachs who served as Treasury secretary under Clinton. He pushed for the freedom of financial markets and went on to accept a job with Citigroup that paid $15 million per year. The company later collapsed during the financial crisis.
But “just as Rubin & Co. were being bailed out at Citi by the Bush administration, President-elect Obama was announcing a new economic team drawn almost entirely from Rubin’s acolytes,” Scheer writes.
Scheer doesn’t offer clues about what threat these players pose now that they are back in play. Lawrence Summers, who helped deregulate derivative contracts under Clinton, is part of Obama’s economic team. But has he showed any signs of a continued push for deregulation? Should Summers and Rubin be written off for their past mistakes?
Although he leaves some unanswered questions, Scheer’s book proves to be a comprehensive beginner’s guide for anyone trying to understand where our economy went so horribly wrong.
Perhaps Bush’s question “How did this happen?” is answered best by Paulson himself: “It was a humbing question for someone from the financial sector to be asked — after all, we were the ones responsible.”