Happy birthday Gramm-Leach-Bliley! You're 10 years old today! And now, a celebration the way only MSNBC's Dylan Ratigan can throw it, with poignant commentary.
The premise is this: back in the day, the Glass-Steagall act prevented banks from doing risky things with people's money by establishing a barrier between investment banks, "main st" or personal banks, and insurance companies. Any money that you put into one of those institutions could not be gambled in other money markets so consumers could be sure that there money was safe.
This was so from 1933 to 1999. It was a measure passed after the crash of the Great Depression caused by banks speculating with consumer money in investment markets.
Sounds pretty air-tight right? This measure would keep people from dabbling in fragile derivative markets using people's pensions or mortgages, which meant that people could not lose their home because a bank's investment accounts tanked.
So what happened? On Nov. 2nd, 1999 Congress passed Gramm-Leach-Bliley. An act that undid that regulatory protection remove the barrier that prevented banks from participating in all three markets at the same time. This gave banks, especially those with more capital in their vaults like Citigroup and Goldman Sachs, the opportunity to make boatloads of money by speculating with people's money and pensions!
Now how did this come to pass? How did Congress let such an egregious measure pass the gavel and out into the financial world? Because lobbyists from Citigroup (yes, the one's that owe us hundreds of billions of dollars in bailout money) coerced congress into passing this deregulatory measure. The deal was made in the backrooms of the White House and Congress and now, we're paying for it.
So grab a hat everybody! Let's celebrate the only way we can! By wading through job applications into a crippled job market where credit is harder to come by than ever before.
Deregulation and "too big to fail" got you down? Feel free to leave comments at the front desk.
5 comments:
I actually have to agree with the Gramm-Leach-Bliley act.
The problem is not that banks participated in unsafe lending nor is the problem that they were not concerned with risk management (though those two things are true as well), the problem is that the banks were "too big to fail".
Unfortunetly, I have to also agree that they were too big to fail, what we actually need is a mixture of trust busting, or new regulation on asset leverage. This would allow the banks to take on risk, but still pay down loss should one occur. While we are terribly unhappy about what has happened as of late, we cannot ignore that the banks' actions made the country significantly wealthier. In addition, while the banks created the products that lead to the now past downturn,(the toxic assets) no one was forcing investors to buy them. The ignorance of the investors was also at fault.
What is needed is a balance between risk, consumer protection and growth. Without risk, we wouldn't be able to sustain economic growth. Naturally, however, with too much economic risk we'll continue to end up in similar circumstances.
So, I'd like to see this in new regulation, if you engage in under-leveraged risk you must be a bank of a certain size, the larger the risk the smaller the bank must be; or if a bank wishes to engage in such risks than leverage per asset must increase based on the size of the bank up to 40% per asset. If such regulation were in place the treasury and federal reserve could either let the bank fail or force the bank to pay its leverage on the asset.
The leveraged asset regulation has two effects. It protects Americans from unsecured systemic risk, and it discourages unsafe risk. If a bank has to hold back in reserve 40% of the potential profit of an asset, just to pay down the bad debt that could occur from an asset (not mentioning the other 60% that will have to come in write downs) than they would be considerably less likely to create assets they think might actually fail.
There is one final thing that led to the now ended economic downturn (we have growth now). One that I think was a stupid assumption all along, but the best and brightest (even the greatest economists thought this) never doubted this. I have to say, if it had been true this downturn never would have begun.
The assumption, "That housing prices will never fall". No reputable analyst, economist, banker, or investor ever doubted that statement. Furthermore, why should they, every piece of data available (in almost ever industrialized nation) shows that housing prices will always rise with time. When it didn't this happened.
There are two reasons I never thought this was true, (Liz had to endure me ranting about this even before the economic downturn. I think Mr. Johnson said it once back in High School and I said it was dumb then...He, "corrected" me.). One, why should an object, any object, that has constant use and little value as an antique (since it's not transportable) continue to rise in price as it continues to depreciate in functionality.
Think about it, it is the only truly expensive item that as wear and tear increases so does its value? Imagine a car with 100,000 miles on it, why on earth should it be worth more now than when purchased new? Perhaps a more perplexing situation is how the addition of a deck wich cost 15,000 to construct adds 50,000 dollars of value to a house. Ask any member of the generation above us and they'll all agree that housing prices should go up with time, but none of them will be able to give a logical reason as to why. The house will be worse off than when it was constructed, but people still expect that for every ten years a house exists its price should double.
The second reason I never liked the, "Housing prices will always rise", assumption is that, well, you will just eventually run out of people to sell houses to. That's what happened essentially, the market ran out of prime borrowers to lend to (for housing) so they created loans that sub-prime borrowers could afford. Thus, instead of following the law of supply and demand, the market artificially created "new" demand. The thought was that if the borrower paid their payments on time they would be able to re-finance into a prime loan by the time the loan would balloon in interest payments, or they would default and the bank would be able to sell the house for more than the borrower owed, "because housing prices would always rise".
In essence, it was a failure of regulation, but also a failure of economists. Even if banks weren't able to participate in all three forms of banking some would and the advice given to them by economists would have encouraged the creation of the toxic assets. Lastly, we need those banks, yes I said it, we need them. One of the reasons the Gramm-Leach Bliley law passed is because of globalization. Investors can take their money anywhere, so if banks in other countries can do that we need to be able to do that too, or as a country we will lose trillions in GDP. As bad as the downturn was, we would not even had reached this level of economic growth (comparing current GDP with what GDP would have been without the banks) if the banks had not existed with the ability to do all three forms of banking.
It's like I told you last night, it's unfortunate that it happened but it shouldn't have happened. Those protections were in place for a reason.
I agree with your methods, and I also concede that in a world where all countries are inflating their GDP using these risky practices, we unfortunately have to play the same game.
Asset leverage regulation seems to be at the heart of things for me, perhaps along with quelling the overzealous housing market. If we can go a little bit further and include some kind of barrier between consumer funds and risky investments, that would go a long way too. We have a long way to go for solid financial form and with the repeal of Gramm-Leach-Bliley it feels like we're sprinting across a tight-rope.
Ah, but did the repeal of Glass-Steagall, the removal of most of our banking regulation, and the willingness on the part of remaining regulators to look the other way http://online.wsj.com/article/SB10001424052748704402404574527963036329046.html in fact generate much wealth? There's some pretty significant evidence otherwise. http://2010.newsweek.com/essay/party-like-its-1999.html
I especially enjoy the Wall Street Journal article about Greenspan because, as a kid growing up, all I heard were good things about the guy. I was honestly convinced that he was the benevolent mastermind the news painted him to be. Perhaps its not so ironic that, during an age under Obama where we're examining things under a more clear light, he suddenly comes out as this deregulating monster with a conservative agenda.
I also enjoyed the Newsweek article, although I do have to say I have to do some more research into economics before I really start wrapping my head thoroughly around articles like that. Overall I get the message though that perhaps economic progress was not as grand as we thought it was under the Steagall repeal. Perhaps not such a coincidental reconception considering that nearly everything that was "good" under the Bush presidency has turned out to be not so under the light of truth.
Boy that sure sounded dogmatic didn't it?
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