Never Fund a Bank without Strings

Among the provisions in the 1933 federal statute – the Glass-Steagall Act – that created the Federal Deposit Insurance Corporation was a provision preventing the same holding company from controlling both a commercial bank and an investment bank. The notion was to keep banks from being torn between their trading interests and the normal lending/savings business inherent in commercial banking. Since commercial banks can borrow money from the Federal Reserve at a vastly reduced rate (well under a percentage point today), that their trading division might borrow money and use it for their own account (investing and speculating for themselves) troubled regulators in that Depression era… so they created what they perceived to be a necessary separation.

Unfortunately, in the free-wheeling days of deregulation, via the Gramm–Leach–Bliley Act of 1999 (signed by then President Bill Clinton), Congress felt that this separation of traditional banking from trading was no longer necessary; that separation provision was repealed, and mega-financial institutions embraced both speculation and investment banking, on the one hand, and old world commercial banking, on the other, within the same house. The results were the acceleration of sprawling financial institutions where the big bucks were made in creating financial instruments and trading them, but where cheap money was always available to those entities that also embraced commercial banking. More than a few of these “too big to fail” institutions fell, and the entire American financial system lurched towards a collective bankruptcy, “rescued” by a massive federal bailout that restored the companies, but did nothing to get these conflicted companies to put the interests of their customers and society in front of their addiction to greed-driven speculation.

Europe had followed suit, as their banks absorbed or created trading/investment banks based on the American model, and of course, they faced many of the same problems, such that the European Union is now actively considering imposing a requirement that commercial banking would no long be allowed to have a trading arm, even though the proposed legislation, if passed, would allow these financial institutions at least seven years to divest.

Between all of the sovereign debt (like that of Greece, Italy or even the United States), the uncertainty of asset values and the ability of those US banks with trading arms to use the money they get from the Federal Reserve for their own purposes, there is very little credit available for small and medium businesses – where most of the new job growth is coming from – and certainly a whole lot less for those seeking traditional mortgages (especially outside of the federally insured lending programs). In short, we rescued these big financial institutions and continue to allow them to borrow money from the Federal Reserve at well under one percent interest without the slightest requirement that they open up credit to those sectors of the US economy that need it most or that can fuel growth most efficiently. Perhaps it’s time to “un-repeal” that controversial provision of Glass-Steagall.

Writing for the January 2012 Vanity Fair, economist Joseph Stiglitz writes: “If we expect to maintain any semblance of ‘normality,’ we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery… What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.” For people who truly believe that deregulation is the cure, they are obviously those who have simply failed to understand – or perhaps even look at – the massive failure that the repeal of sensible legislation had on our economy.

I’ll end this blog with this little snippet from the December 20^th, LBNelert: “Many tout the U.S. as the Roman empire of the modern world. But as it turns out, that comparison may not be all good. Income inequality in America is at levels even higher than those in ancient Rome, according to a recent study from two historians, Walter Schiedel and Steven Friesen, cited by Per Square Mile. After analyzing papyri ledgers, biblical passages and other previous scholarly estimates, the researchers found that the top one percent of earners in Ancient Rome controlled 16 percent of the society’s wealth. By comparison, the top one percent of American earners control 40 percent of the country’s wealth, according to Vanity Fair.” Not particularly good news for a country where the miscreant bankers are making more money than ever, the US middle class is eroding at an alarming rate, and according to the US Census, 1 out of 2 Americans is living at a “low income” level… or less.

I’m Peter Dekom, and simply repeating the obvious mistakes of the past is hardly the path out of this economic debacle.