McCain on financial crises: rhetoric versus reality

by Dustin

Despite McCain's calls for getting crooks out of the financial system, and "greater transparency and accountability," his economic policy promotes such systemic corruption and dead-end risk taking. His main influence on economic policy and recent cochair of his Presidential campaign is former Senator Phil Gramm.

Gramm was an author of legislation that repealed the Glass-Steagall Act, originally enacted during the great depression to keep speculative banking (investment and insurance) separate from commercial banking (loans). The repeal of Glass-Steagall is a contributing cause of the sub-prime mortgage crisis and has led to the widespread use of many risky security instruments such as mortgage-backed securities and collateralized debt obligations, which have led to the recent meltdown of some of the biggest financial firms in the US.

This issue is not one of a few bad apples in the system as suggested by McCain. That he does not see this as a systemic problem, spawned from legislation he voted for, speaks volumes about his incompetence on the economy. Or it reveals his allegiance to a constituency, big banking companies who want capitalism for profits and socialism for losses. This system cannot become more transparent or accountable in its current form. But instead of meaningful banking reform, McCain is calling for an "investigative commission" and more deregulation of financial markets.

There are parts of the economy of that need regulatory oversight. The regulation of banks, investment houses, and insurance companies and their associated conflicts of interests are critical. The temptation to offer a loan, make money by packaging it to investors as a security, and then make more by offering to insure it against default–all under one roof–will always pose the potential for severe market failure.

What are the consequences? If you are a big banking investment house, this matters very little. The name will be sullied, and shares wiped out, but they are playing with house (taxpayer) money, and can take excessive salaries and dividends in the good times. But in the end it matters for tax payers and the economy more generally because it undermines investments–public and private–in infrastructure and other things in the tangible economy that foster job creation.

Just think, John McCain's plan to privatize social security would entrust these same banks with your future. Do you have faith in their capacity to manage your money?