PRIMING THE SUBPRIME CRISIS

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JAMES MCCUSKER, EVERETT HERALD, WA - In the wake of the 1929 stock
market crash and the subsequent global economic depression, Congress,
among other actions, passed the Glass-Steagall Act which prohibited
banks from engaging in securities underwriting. There was money to be
made in securities, though, and after a suitable period of penance for
their contributions to the crash and depression banks began to agitate
for relief from this restrictive law.

The banking industry's whining about Glass-Steagall eventually paid off.
. .
Few people spoke out against the idea, which was endorsed by America's
top banking regulator, Federal Reserve Chairman Alan Greenspan. It is
tempting to say that his enthusiasm for the idea, and Congress' action,
made sense at the time, but that was not so. In fact, it made no sense
then, and makes none now. . .

Banks eagerly bought up low-quality mortgage loans, packaged them up and
sold them as securities -- all the while using "three-card Monte"
accounting constructs to keep the transactions off their balance sheets.
. .

The Federal Reserve, the president and Congress have their hands full at
this time. Their first priority is damage control, and that is as it
should be. Eventually, though, the economy will right itself, with or
without Washington's help, and the president, the Federal Reserve and
Congress will have time to consider what got us into this fix in the
first place.

If we had to pick a single event that set off this economic stink bomb,
it would have to be Alan Greenspan's decision to support the expansion
of bank activities into securities underwriting. While the Congress has
a mind of its own, it is extremely doubtful that they would have
approved this expansion in the face of his objections. He was at the
height of his powers then, and his support for the idea made it
bullet-proof, politically.

As soon as possible, Congress should extend its damage control
operations to put banking back on solid ground, and reconstruct the wall
between banking and stock-market gaming.

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