Is It Time to Throw the Fox out of the Henhouse?

Posted by Jim DeBellis on June 6th, 2011

Is it possible that some members of Congress are finally looking deep enough behind the disease in the housing market to see some of the root causes? Maybe so. Rep. Marcy Kaptur, a Democrat from Ohio, is introducing a bill (H.R. 1489) that would bring back some parts of the Glass-Steagall Act that was repealed in 1998.

You might recall that last week I was bemoaning the fact that, since the late 90s, the slick investment bankers have been allowed to slither into the stable commercial banking business and bring our home mortgages into their Wall Street casinos. That was due to the 1998 repeal of Glass-Steagall (under a Democratic president and Republican Congress, so no one is home free on this one). Glass-Steagall was around since 1933 (not exactly the good old days) to separate banking and speculation.

As Kaptur nicely explained it, “High-risk behavior in America’s housing market began during the early 1990s, when financial deregulation pushed by some here in Congress allowed the private financial sector to turn formerly prudent mortgage loans into bonds and then securitize them into the international market in a manner that bore no relationship to true value nor the local real estate market. … And when the Glass-Steagall Act that had separated banking and speculation since 1933 was wiped off the books in 1998 under that Leach-Bliley, the speculators were unleashed full-bore.”

It will be interesting to see how this plays out, though it surely won’t get much big media coverage. The common sense Republicans should like it – except for the fact that it wasn’t their idea. Everyone has been looking at Fannie and Freddie as the villains, and they certainly did play a big role in guaranteeing risky mortgages. But without the irrational exuberance of big-time billionaires who could make more billions with mortgage securities by leveraging a small investment (meaning most of the money they stood to lose would be ours), there never would have been a stampede and drunken mortgage orgy to dig us into such a huge hole so quickly.

Whatever happens, it is encouraging to see that some are trying to go beyond the palliative Band-aids that cover the surface blemishes and give us a false sense of healing. At least one Congresswoman is seeking the kind of solution that helped get housing through the Great Depression and kept it on an even keel through many decades of prosperity.