From the beginning of his political career as a Barry Goldwater Republican, John McCain denigrated the wise teaching of Franklin Delano Roosevelt: that unregulated free markets are inherently rapacious and unstable. For 27 years, through debt-producing Reaganomics—especially deregulation—McCain promoted corporate permissiveness, a culture that included risky speculation, debt-financed mergers, leveraged buy-outs, quick profit-taking, and the inevitable cry from Wall Street for public bailouts when the casino goes broke.
The unfettered free market—the economic Frankenstein that stalks our land today—was conceived in the test tube of Reaganomics in the early 1980s. McCain-backed deregulation helped to destroy one of the greatest economic achievements in American history, the savings and loan system established during the New Deal. For over 50 years American thrifts were the envy of the world. They occupied a hallowed place in the U.S. economy, immortalized by Jimmy Stewart in It’s a Wonderful Life. The New Deal financial system made home ownership affordable for millions and millions of working-class Americans, families of modest means. Protected by strict financial regulations and federal scrutiny, small, locally insured banks spawned an emerging middle class through 30-year fixed-rate mortgages. These thrifts, which lasted until the Reagan ’80s, became the engine of homebuilding throughout America.
When savings and loans concentrated on home loans, they were the bedrock of stability. Between 1945 and 1981 there were no more than 262 bank failures, an average of 11 per year.
Then something went wrong. Reaganomics took over Washington. On Oct. 15, 1982, President Reagan stepped through the French doors of the Oval Office, sat down, and signed the now-infamous Garn-St.Germain Act, which deregulated the savings and loan industry. The safety barriers between speculators and thrifts were taken down. In order to “get the government off the backs of business,” Reagan laid off hundreds of regulators, and soon the wolves of high finance mingled freely with the sheep of mainstream America. McCain and the Republicans (and far too many Democrats) cheered the liberated market. The party began. But within less than two years America’s deregulated thrifts began to crash. Between 1983 and 1987, as a direct result of deregulation, there were 481 bank failures. Hundreds more followed, as American thrifts were sucked down into the vortex of greed and speculation. Deregulation essentially gave banks and speculators a license to gamble with other people’s savings. There were more savings and loan bankruptcies under Reagan than at any time since the Depression. Nearly 1,600 U.S. banks were in trouble when Bush stepped into Reagan’s shoes. When the casino crashed, the financiers forced the public to cover their loses, and McCain played both sides. He allowed unregulated corporations to privatize their profits in the good years, only to socialize their costs when times were hard.
McCain’s direct involvment in the S&L debacle
John McCain was deeply involved—personally involved—in the savings and loan catastrophe. The “Keating Five” scandal is well-documented in a host of books. McCain’s friend and benefactor, Charles Keating, owned a failing thrift, Lincoln Savings and Loan. At a time when Lincoln—like hundreds of other deregulated thrifts—was drowning in risk and fraud, McCain (along with four other senators) pressured federal regulators to overlook Keating’s violations of regulatory guidelines.
Upset by the sheer sleaziness of the Keating Five meeting, Edwin Gray, Chairman of the Federal Home Loan Bank Board, wrote an angry letter to John McCain. “I have never been asked until this meeting with you and your colleagues—by any United States senator—to withdraw a regulation for any reason, particularly on behalf of a friend, and especially in the privacy of a senatorial office.” The fall of Lincoln in 1989 cost taxpayers $2.5 billion, part of the estimated $300 billion bailout for the entire S&L industry in the early ’90s.
Gramm’s deregulation of energy
McCain continued to roll back government involvement in the economic life of the nation throughout the ’90s. In 1998 the financial services industry successfully pressured Congress to repeal the Glass-Steagall Act, a New Deal statute that reduced the risk of bank failures by separating commercial banking, investment bonds, and insurance.
Phil Gramm, a former co-chair of McCain’s presidential campaign, played a crucial role in the 1998 deregulation binge. Gramm was Enron’s legislative ally. He received $34,000 in contributions from Enron. (His wife later served on Enron’s Board of Directors.) Gramm inserted a pro-Enron provision into the Financial Services Act, exempting energy trading from regulation. The ink was hardly dry when Gramm’s bill, backed by Senator McCain, spawned economic disaster in California. Free of regulation, Enron deliberately created an energy shortage, caused statewide blackouts, then jacked up prices.
The Gramm story is not a question of guilt by association. Gramm and McCain acted as a team, and they share the same deregulation agenda, in Gramm’s own words, “to protect financial institutions from over-regulation.”
Deregulation of the financial industry is a major cause of the Wall Street crash. McCain’s deregulated chickens are coming home to roost. On us.
Paul Rockwell is an Oakland writer.