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| -Signs, Portents, and the Weather- |
| War on Wall Street as Congress Sees Returning to Glass-Steagall |
| 2009-12-28 |
| Posted by:Chuns Phuse8788 |
| #11 by the Bush admininstration which used house 'value' to keep consumers buying in order to finance the wars indirectly. I don't know that the Bush administration planned on using house values to indirectly finance the wars without raising taxes, but I do understand that the housing bubble did have that effect. Had the housing bubble somehow been killed at birth and no other bubble started, there would have been a recession instead. The US has been consuming far more than it produces for quite some time, the housing bubble just masked that. I don't get that the Congressional mandate for loans to poor prospects had much of an effect on the housing bubble. CRA has been in effect since 1975 & wasn't a problem for the first 30 years. The explosion of credit default swaps had nothing to do with CRA & everything to do with the government preempting the states laws against CDS. In addition the SEC gave the 5 biggest banks an exemption from its old 12-1 reserve ratio (approx) after which they went to 40-1 leverage. Still, no one forced the banks to go hog wild between 2005 & the crash, they did it themselves. Their excesses were not rational by any means, but greedy and shortsighted. |
| Posted by: Anguper Hupomosing9418 2009-12-28 21:49 |
| #10 and also by the Bush administration which used house 'value' to keep consumers buying in order to finance the wars indirectly. A very interesting thought, lotp. When you have time, I'd love an expansion. |
| Posted by: trailing wife 2009-12-28 17:56 |
| #9 And what the Congress did was just the opposite: mandated risky loans to poor prospects with the implicit guarantee of government bailouts - but without any disciplined tracking of the risk that such would be needed and with overt threats if the banks priced risk into the loan rates. I don't see any great likelihood that separating investment from commercial banking will do much to prevent that sort of ideological bias. It's not fair to say that the banks mismanaged risk - they responded quite rationally to the pressures presented them by Congress and also by the Bush admininstration which used house 'value' to keep consumers buying in order to finance the wars indirectly. Market failure mandated, abetted and utterly unsurprising as a result. An indirect analogue happened with the Great Depression. Combined with tariffs on imported goods, Glass-Steagall decoupled commercial loans from risk offsets the banks could have made on the investment side. What the Congress thought was a safeguard against market risk meant that risk could not be measured or offset, with the inevitable result that banks stopped lending, the CRA not having yet been adopted. Most people don't realize how important credit is to tangible goods businesses. Access to well priced funds for inventory, cash flow management and investment is a huge multiplier of economic activity. Cut off that flow and business activity dries up. But capital for lending has to come from somewhere ... and if it is limited to simple deposits, that is a very limited source compared to markets. |
| Posted by: lotp 2009-12-28 16:39 |
| #8 The trouble is this... Glass Steagle basically boils down to saying that bureaucrats can avoid systematic risks at banks. They cannot. The trouble was in the volume of credit (and governments loved taxing the effects of the credit). The way to lower the volume of credit is to raise reserve requirements. |
| Posted by: Bright Pebbles 2009-12-28 16:23 |
| #7 limiting the ability of commercial banks to manage risk did indeed IMO strongly deepen the GD Please provide links to background info on your assertion. This is the only place I've found this. Glass-Steagall was overturned in 11/99. Between 1940-1999 I see little evidence that commercial banks had trouble managing risks. Since 1999 commercial banks have done a superb job of mismanaging risk, the best ever in world history, and all this mismanagement was done without the burden of Glass-Steagall. Even the former head of Citigroup, which came into existence only because of Glass-Steagall's repeal, has expressed his regret for that change in the law. Paul Volcker supports reinstatement of it, very strongly. |
| Posted by: Anguper Hupomosing9418 2009-12-28 15:04 |
| #6 I agree that the removal of the walls between investment banking and institutional banking were significant contributors to the current financial chaos. Had some provisions of Glass Steagall been in place, those huge losses by the investment houses on mortgage derivatives would not have leaked over into the institutional side and caused the credit crunch and the damage now in place. I like being about to use a ATM card in Maryland at a branch of my bank in California. Interstate banking does not bother me...the elimination of the wall between investment and institutional banking does still and needs to be put back in place. I notice...that I am using....a lot of dots in my posts...these days...am I channeling Maureen Dowd?....Crap. |
| Posted by: Karl Rove 2009-12-28 11:05 |
| #5 Neither measure helped but I was indeed thinking of Glass Steagall. While it had short-term tactical value, prohibiting interstate banking and limiting the ability of commercial banks to manage risk did indeed IMO strongly deepen the GD, given the rampant hyperinflation in parts of Europe at the time (among other issues). |
| Posted by: lotp 2009-12-28 10:10 |
| #4 I suspect you are thinking of Smoot-Hawley, the tariff bill. Glass Steagall separated investment banking from commercial banking and prohibited interstate banking, among other things. It was passed in response to the GD and was not a cause. Its reimposition would do much to help us out of our current difficulty. |
| Posted by: Nimble Spemble 2009-12-28 09:24 |
| #3 Nah, the gold standard caused the great depression. Glass Steagal just didn't help. |
| Posted by: Bright Pebbles 2009-12-28 08:54 |
| #2 Glass-Steagall turned a severe market downturn/burst bubble into the Great Depression. |
| Posted by: lotp 2009-12-28 08:26 |
| #1 Hopefully as successful as the war waged by Wall Street, it's lobbyists, and its Congressional and Executive sock puppets to loot the American taxpayer to cover their gambling loses. |
| Posted by: Procopius2k 2009-12-28 08:17 |