More of the Usual Bastards….

Right—so plunking down a serious amount of money yesterday to buy an apartment may have triggered my interest in the subject. Or perhaps it was spending an hour yesterday in the bank, getting the money. But whatever the cause, I’ve got finance on the brain today.

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?

Don’t look at me—beyond the stocks and bonds stuff, I haven’t the faintest idea.

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?