Most people
have a strange relationship with money; they want it, of course, they’re afraid
of it, oddly, and they don’t understand it. Which is too bad, because if they
did, they’d be better off.
Full
confession—I don’t understand it either. But it’s also the case—as we saw in
the 2007
economic collapse that is still reverberating, in many parts of the
world—that many of the experts got it monumentally wrong as well.
What
happened to tilt us all onto the brink of disaster? We had a housing boom combined
with too easy credit.
Everybody who had a pulse “qualified” for a mortgage, which the bank bundled up
with a large group of similarly bad mortgages and then sold them all off as a
security. And there was lots of money out there because we don’t make anything
anymore—we import it. So China bought and bought these securities and that
allowed for the banks to help homeowners refinance their mortgages, which they
had to do to keep sustaining a large amount of household debt, because of
course we had to have more and more stuff, all made in China. See?
(Note to
economist Readers—I know this is a simplification, but it’s also (sort of)
understandable. Now, find me one of you who can write anything less soporific
than valium!)
In short,
it was a bubble, the lifecycle of which is—splat!
Or perhaps
bubble is too gentle an image. It was a time bomb exploding in a hurricane. And
now, five or six or seven years later?
Things are
no better.
Speaking
structurally, the system is just as weak, just a prone to implosion as it ever
was. Wait, you say—didn’t we pass Dodd
/ Frank? Wasn’t that supposed to reform the banking industry?
Certainly
was—but a bill is one thing. You need regulations to implement it, so what has
the banking industry been doing? Sitting in Washington, and shooting loopholes
through the Dodd / Frank bill.
And that’s
a shame, because it could really be very simple. The United States has broken
up megaliths before—anybody remember Ma Bell? Why can’t we tell the
five biggest banks that they have to divest?
Or, argues
Dean Baker, a co-director
for Center for Economic and Policy Research in Washington, DC, we could just
bring back Glass-Steagall.
Glass-Steagall?
Right—I
didn’t know about it, either, but that’s why we now have Google.
Glass-Steagall, named after two senators, was passed in 1933 in response to the
multiple bank failures. Here’s Wikipedia’s summation of the matter:
The term
Glass–Steagall Act, however, is most often used to refer to four provisions of
the Banking Act of 1933 that limited commercial bank securities activities and
affiliations between commercial banks and securities firms.[2] This article deals with that limited meaning
of the Glass–Steagall Act. A separate article describes the entire Banking Act of 1933.
You want to
buy a house—you go to the bank. In the old days, the bank asked logical
questions like, “do you have a job?” Or they might inquire; do you have
something of value—a Monet haystack or two passed down from your great aunt?
They requested a letter from your boss. In the truly old days, everybody knew
everybody—which meant it was no secret who dipped into the sauce and who beat
his wife.
You get
your mortgage, you make your payments, and you assume that that money goes
right into the basement vault, to be pulled out for the next guy with a
mortgage. Or a car loan. Anyway, a loan of some kind.
Wrong.
The bank
has a securities company—which you don’t understand because it’s not a house or
a car but stocks and bonds and you don’t get that stuff. OK—you do, but what’s
an EFT?
What’s an asset-derived derivative? What’s
all this stuff about futures
and shorts and longs?
But guess
what? My bank has a security company, and they are taking all my money and
sticking it into all this stuff I don’t understand. I got the
money-in-the-vault-waiting-for-the-next-borrower idea—that’s easy. But
essentially, I am playing the stock market unwittingly, at second hand. Because
what happens when the market crashes, and the security company that I didn’t
even know about goes broke? Does it drag my bank with it, and do I lose all my
money?
No—we have
the FDIC,
which will insure you up to a million bucks (hint for the many wealthy Readers
of this blog—once you have a penny over a million, open a second account…added
value, with a nod to my Wal-Mart days!) So individually, you’re safe. But as a
society, as we saw, the havoc is enormous.
And what
did Glass-Steagall do?
It created
a strict division between commercial banks and security companies. Wikipedia
couldn’t put it better:
The Banking Act of 1935
clarified the 1933 legislation and resolved inconsistencies in it. Together,
they prevented many or most deposit institutions [Sic.] national from:
• dealing in securities for customers
• investing in most securities themselves
• underwriting or distributing most securities
• affiliating with companies involved in such similar activities
• sharing employees with organizations involved in such similar activities
Wait,
you’re saying, so we had that law in place? So how did we get into this mess?
Because
first we chipped away at it, and then we repealed it by the Gramm-Leach-Bliley
Act of 1999, when most people thought Glass-Steagall was already dead.
In short,
if you want to play the stock market, do it. Your bank, however, cannot do it
for you, often without your knowledge, and never with your getting the profit.
It was
simple, it worked for sixty years. Five years after we gutted Glass-Steagall,
the economy imploded.
And now we
have a problem—because it was easy to enact Glass-Steagall in 1933. Why?
Because people were in the streets, shouting—the banks were going broke, people
were losing everything they had, huge and unruly lines formed around banks,
things were quickly devolving into an uprising. And now?
Uncle Sam
has allowed the banks to keep screwing around—and they are—AND has agreed
to bail
them out when they fall flat on their face. So that means nobody is pounding on
the doors and demanding change. Oh, and by the way, has anyone noticed that the
banks always soar the highest, when times are good, and dip the least when
times are bad?
By sheer
coincidence, I live three blocks away from the president of my bank. However, I
frequently withdraw money from the automated teller machines of my bank in New
York City—a branch of Banco Popular
being just up the street from my brother’s apartment. Oh, and the bank has
branches in Florida and Chicago.
And though
I live quite close to the president of the bank, I don’t know him, though I
have seen him. We’ll probably never get back to the days when the president of
the bank knew everybody in town. But can’t we at least stop a bunch of greedy
security brokers from putting the entire world’s economy at risk?
