John McCain, the reborn populist, wants to divert your attention from the architects of our economic crisis: the Republican Party and its free market ideologues. It is an unconvincing posture, based on a distorted reading of American history.
Today's financial crisis is the predictable historical outcome of the policies enacted by the Republican Party since Ronald Reagan's presidency. The market fundamentalism dictating Republican policy has become so pervasive that most Americans are unaware of how we got here and how it could have been avoided.
To fully appreciate the role of the Republicans enablers in our current crisis, we have to go back in time to the event this most resembles, the panics that set in motion the Great Depression, and what was done then to end the crisis.
When Democrat Franklin D. Roosevelt took office, the nation was in the midst of a banking meltdown. FDR and his advisors zeroed in on financial speculation. Many of the hallmarks of the New Deal were designed specifically to curb speculation, regulate the financial sector, and protect ordinary Americans from becoming collateral damage of Wall Street's predators. The Glass-Steagall Act (1933) separated commercial from investment banking and created the FDIC to insure small savings. The idea was to create a firewall between the small savings of individuals and the creative minds on Wall Street, and instill confidence in the banks holding the nation's savings. The Truth in Securities Act (1933) and the creation of the Securities and Exchange Commission (1934) aimed to prevent the scandals, lies, and pyramid schemes that had brought the stock market crashing down in 1929. These acts, of course, were part of a broader package that included substantial relief for suffering Americans and vast public investment.
Schooled by depression, fascism, global war, and genocide, economists, policy-makers, and the citizenry of Western industrial democracies concluded that capitalism left to its own devices spelled chaos and disaster. After World War II, the international financial system designed and led by the U.S. limited international financial speculation as well. In a word, regulation, enforced by independent, knowledgeable, and conscientious employees of the federal employment was the cure for "greed." In this tough regulatory environment, the long postwar era was comparatively free of the speculative bubbles that have landed us in our current mess.
What changed? In the 1970s, as the U.S. and advanced industrial economies stagnated, advocates of the free market made a comeback. They insisted that excessive business regulation and high taxes were the problem. The market would work its magic, they promised, if it was allowed to operate freely. According to their theory, deregulation would draw private investment into the market and simulate economic growth. The benefits would trickle down to the working majority.
Reagan's election in 1980 gave the deregulators their political opening. Reagan, an adherent of "supply-side economics," waged war on the New Deal and attempted to remake the federal government according to the principles of free market fundamentalism. He slashed taxes on the wealthy, cutting social spending to partially make up for the budget shortfall. (McCain's own Phil Gramm, then a Democrat, was a co-sponsor of Reagan's budget-cutting legislation.) In command of a vast federal government he scorned, Reagan appointed zealots of deregulation to manage the federal agencies charged with enforcing the nation's laws. Their mission was to destroy from within. Just as we learn that the SEC concedes oversight flaws fueled collapse in today's crisis, so too did lax regulation by Reagan's SEC create conditions for the 1987 market plunge, the first major stock market panic since the 1929 crash. Reagan gloried in the deregulation of the Savings and Loan industry in 1982. Over the next several years, more than 1,000 savings and loan institutions collapsed under the weight of their bad investments, investments they had been prohibited from making before deregulation. The American taxpayer bailed them out in 1989.
Free the market through deregulation and tax-cuts was Reagan's mantra. Reaganomics has been the program of the Republican party since the 1980s, with each generation of Republicans carrying it to a further extreme. John McCain reiterated at the first debate that he is a proud and true Reagan conservative. We would be advised to take him at his word.
Barack Obama is correct that the best opportunity for making the economy work for all Americas is to fire those who made up the current rules of the game. What he should be saying more forcefully is that Democrats need to return to our roots. Government is the solution, not the problem.