"The Glass-Steagall wall was devised to prevent a repeat of the 1920s' scams"

[ProSense]

The Bubble Economy

The sub-prime mess, the huge risks taken by hedge funds, and the conflicts of interest that led to Enron are all the consequences of serial bouts of financial deregulation. Will we reverse field in time to prevent another 1929?

Robert Kuttner | September 24, 2007

The federal reserve is still struggling to contain what is already the most severe credit contraction since the Great Depression. Yet in all of the press coverage, commentators have scarcely acknowledged that this old-fashioned panic is a child of deregulation. During the past decade, the financial economy has repeated the excesses of the 1920s -- too much borrowing to underwrite too many speculative bets with other people's money, too far beyond the reach of regulators, setting up the entire economy for a crash.

The sub-prime mess, the huge risks taken by hedge funds, and the conflicts of interest that led to Enron and kindred scandals, are all the consequences of serial bouts of financial deregulation. Since the 1970s, in the name of free-market efficiency, Congress and presidents of both parties repealed key protections put in place by the New Deal. But the main effect has been to engineer windfall profits for financial insiders, replace real productive innovation with financial engineering, shift wealth from families to corporations, and put the entire American economy at ever greater risk.

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The Glass-Steagall wall was devised to prevent a repeat of the 1920s' scams, in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank. With Glass-Steagall, commercial banks were tightly supervised and given access to federal deposit insurance, to keep savings secure and prevent runs on banks. Investment banks, meanwhile, were not government-guaranteed and were free to do more speculative transactions for consenting adult customers. But Roosevelt's newly created SEC subjected securities markets to much tighter structures against self-dealing and insider conflicts of interest.

The New Deal also acted on the home mortgage front. Millions of people were losing their homes and farms to foreclosures, both creating human tragedies and deepening the Depression. In response, the Roosevelt administration literally invented the modern system of home finance. Pre–New Deal mortgages had typically been short-term notes, where most of the principal was due and payable at the end of a brief term, often just three to five years. The New Deal devised the modern long-term, fixed-rate, self-amortizing mortgage. Congress created the Federal Housing Administration to insure these mortgages and win their acceptance among lenders. It also created the Federal National Mortgage Association to sell bonds and buy mortgages, and thus replenish the funds of local lenders. And the New Deal devised a system of federal home loan banks to supervise and advance capital to savings and loan institutions. Deposit insurance was extended to government-supervised mortgage lenders.

The system worked like a watch, combining sound lending standards with expanded opportunity. The rate of home ownership rose from 44 percent in the late 1930s to 64 percent by the mid-1960s. Savings and loan associations almost always ran in the black, there were no serious scandals, and the government deposit-insurance funds regularly returned a profit.

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SOUND MONEY by Christopher Farrell October 29, 1999

Goodbye Glass-Steagall, Hello Big Mergers -- and Big Fees?

Banks, insurers, and brokers can now team up like crazy, but savvy consumers won't let the behemoths overcharge for their services

You almost wouldn't know it for all the obsessive talk about the markets' short-term outlook recently, but finance history was made last week. After some two decades of debate, Congress and the Administration have reached agreement on repealing the outdated Depression-era Glass-Steagall laws that kept the banking, insurance, and securities businesses separate. True, each industry has been invading the others' turf for years, but in a haphazard, piecemeal fashion. Regulation will finally recognize that all three are essentially in the same business: managing society's savings.

The implications of the new law are enormous. For instance, like other deregulated businesses, a merger frenzy of potentially unprecedented scale and scope is likely to be unleashed in the financial-services industry. Regulators rightly worry that these new behemoths will be considered too big to fail, encouraging their managements to throw the dice by lending recklessly throughout the global economy. These companies would profit handsomely if the gambles pay off, and taxpayers pick up the tab if they don't -- shades of the 1980s savings-and-loan crisis.

But there's something else that matters deeply to consumers right now: fees. Will bank charges go higher as the financial-services industry rapidly consolidates? After all, fees have soared during the bank mergers of the 1990s, and mutual-fund companies have managed to hike theirs year after year during the Great American Bull Market. Or will fees fall, thanks to new efficiencies and heightened competition?

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Economists: Gramm To Blame For The Current Crisis

[Joe Chi Minh]

1. And rank misrepresentation of Adam Smith's precepts played a major role

in this. I was going to say, "philosophical", but only Smith's actual precepts could properly be described as a consistent philosophy. The idea that Smith believed in the neo-liberals' concept of a free market is beyond risible. It was precisely because he recognised the anti-social temper of the business man that he kept inveighing against their chronically anti-social, untrustworthy nature. He was a moral philosopher!

Instead, he was simply iterating the age-old Christian precept that Grace builds upon Nature. Don't destroy the unevolved and brutish. Take what benefit you can from them, and enable them to contribute to the common weal, in spite of themselves. We all have the hidden template of God's image within us. We must uncover it in ourselves and others as best we can.

[ProSense]

2. The Long Demise of Glass-Steagall

The Long Demise of Glass-Steagall