A re-instatement of Glass-Steagall
market-ticker.org
market-ticker.org
In his closing he says that passing this measure will "usher in a productive explosion in America that we have not seen in the last 50 years."
The last 50 years have already seen the largest sustained economic expansion in all of human history. Is that not good enough somehow?
I want my ten minutes back.
so is the problem the institutions that are asking for money? or our politicians that are giving them money?
Better not to have such powerful and important banks.
Sarcasm is definitely the way to go if you want to foster a productive debate.
The author doesn't seem to realize that Glass-Steagall won't prevent commercial banks from making bad home loans.
From the article: Lending went to finance productive assets (e.g. factories, machines, tractors, combines, etc) instead of financial speculation as it had in the 1920s.
Instead of speculating in "finance", lending went to speculate in "productive assets" like equities and bonds.
Seriously, what is this tripe doing on HN?
This is exactly what the article advocates forcing commercial banks to do.
Of course, the article doesn't make any distinctions that either matt or karzeem make, such as debt vs equity or CDO vs CDS.
For example, say I make a $200 bet with you that a coin comes up heads, and a $200 bet with pg thatit comes up tails. I've made $400 in bets, but I have only $200 in liabilities. Or I might buy a long position in apple, thinking it will go up. Then I think Steve Jobs might die, so I buy a short position. I now hold twice as many contracts, but my liability is completely covered.
$400b in CDS is a meaningless number until we know how much of it was a liability.
But at the same, everyone in finance — even the most vanilla, small-town, we-just-take-deposits-and-make-safe-loans banks — works with money that has some nonzero chance of shrinking. The difference is that some correctly account for their worst-case scenario and others don't.
Not sure where I'm going with that except to wonder whether there's some system that allows for speculation (i.e. opportunities to make money by making the right bet where someone else made the wrong one) while not tolerating a nonzero chance of a 2008-style meltdown.
Not so fast. US banks were basically required to own Fannie and Freddie stock plus if they didn't make "enough" loans to people who realistically couldn't pay them back, they got dinged by regulators. (Wells Fargo was getting hammered over this.)
The stock holding is what pushed many of them into technical insolvency when Fannie and Freddie cratered. Combine that with regulators pushing mortgage-backed securities and you've covered the bulk of the problem.
Throw in some govt officials who decided to pay off Goldman et al with taxpayer money instead of letting them rely on the "insurance" and collateral that they'd arranged, and the rest is a minor blip.
This would not have been possible with Glass-Steagall in force. Banks can still make loans but they could not securitize or sell the loans. They had to keep the loans on their books. This means the institutions and even individual people that made the loans would be responsible that they got paid back. Furthermore, all loans that are on the books would be regularly examined by banking examiners from the FDIC. When securitizing the loans, banks mostly avoided examination, on the grounds that they got their money for the loans so it does not matter much whether the loans perform or not.
Now it cannot be guaranteed that Glass-Steagall will prevent bubbles in general, but it is certain that what happened last time could not possibly happen with Glass Steagall in effect.
Regarding your second statement, I think you are confused about it again. When Glass Steagall was in effect regular commercial banks were rather limited as to the securities they could purchase. I believe they were allowed to make only 10 percent of their income from securities. They had to make most of their money by making loans directly to borrowers, instead of trading securities. That is what the article is referring to.
That is how securities markets work. Exactly the same forces affect, say, the CEO who owns .1% of his company's outstanding stock. Not an ideal situation, but not one that should be banned.
I believe they were allowed to make only 10 percent of their income from securities. They had to make most of their money by making loans directly to borrowers, instead of trading securities. That is what the article is referring to.
You're probably talking about the time before S&L deregulation, when, at one point, savings and loans had an aggregate negative net worth because they could only make long-term loans (mortgages and treasuries) and thus got buried when rates went up. Despite our current problems, I don't believe the US's financial sector has had a negative net worth since then. It should be pretty compelling to you that despite higher leverage, intertwined derivatives, the disastrous market manipulations of Fannie and Freddie, etc., our less regulated system is still less of a disaster than what came before it.
Ok that's how securities markets work. So what's your point? It is still the case that this would not have happened if Glass Steagall was in effect because it ensured that certain types of banks were simply not exposed to the securities markets. Oh and by the way Glass Steagall does not ban owning securities, it still allows other types of banks (investment banks) to own all the securities they want.
"You're probably talking about the time before S&L deregulation ... "
No I am not talking about the S&L deregulation, I am talking about the Glass-Steagall act. You know, the thing I said I was talking about. That whole paragraph is a rather confused straw man argument.
"The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument.
That there are ways to deal with it? That we've been dealing with it for a couple centuries now? That agent-principal conflicts are well-understood? There are costs and benefits to separating ownership from control. One of the benefits is that talented people can manage established companies; you don't have to be a Goldman or a Sachs to run Goldman Sachs.
No I am not talking about the S&L deregulation
That portion of the comment was sarcastic. I was making fun of your assumption that a regulatory regime that rendered S&Ls insolvent was somehow superior to one that didn't render the (much more leveraged) investment banks insolvent.
"The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument.
Surely guaranteeing trillions of dollars of tax-subsidized mortgage loans had nothing to do with the real estate bubble! It was those perfidious bankers!
Since Glass-Steagall restricted just a tiny subset of those conflicts, I'm wondering why you are so focused on it. If agent-principal conflicts need to be placed under government supervision, so be it -- but that's a much bigger issue than just whether a bank needs to own only 0% or 100% of the loans it initiates, and nothing in between.
Yes there are multiple agent principle conflicts associated with securities, but that is ok, because people that invest with securities should be able to know, understand and value the risks. This is not true of the average plumber, electrician or waiter. You cannot expect them to understand the complexities of international finance and all the byzantine securities banks sell and buy just to be able to judge whether an individual bank is safe to deposit your pay check in.
Thus, we can either have a system where some regulation exists that ensures that depositor's money is safe or we can say buyer beware, which means that after being burned a couple of times the average person will simply not trust and not use the banking system. This is actually what happened after the crash of 1929 and before Glass Steagall was passed and the FDIC was set up.
We know from that period that if ordinary people do not use the banking system, enormous amounts of capital are simply not put to work (i.e., they are stowed away under matresses, etc.) and the economy contracts greatly.
So that we have discovered that it is generally beneficial for the government to insure the bank deposits of ordinary people up to a certain amount. This is something that happens in pretty much every modern industrialized nation nowadays.
Now it is obvious that if the government is to insure certain banks, it should take steps to make sure that these banks are safe, and that is what the requirements of Glass Steagall are all about. Of course Glass Steagall allows for banks that do not take deposits (i.e., investment banks) to invest in as much securities as they want and to generally to engage in much riskier behaviour.
False. This happened all the time with Glass-Steagall in force. Glass Steagall was repealed in 1999, mortgage backed securities were issued and sold long before then. Many commercial banks traded MBS under Glass-Steagall as a way of reducing their risk; in fact regulatory bodies encouraged them to do this.
You are incorrectly conflating many activities, and assuming Glass-Steagall prevents all of them.
As for my second statement, I'm mocking the article's silly idea that investing in "productive assets" is somehow different from "financial speculation." I'm not making any claims about what percentage of their assets they would speculate with (either in the form of equities or bonds).
We are really getting into details here. This was technically partially true, because Glass Steagall was being progressively watered down long before it was actually repealed. So commercial banks were allowed to underwrite some securities but again there were limits as to how much they could do. I think the limit started at 5% of revenue and then progressively expanded to 25% as GS was being further watered down. But I doubt banks would have been allowed to create the huge amounts of mortgage backed securities they did after the repeal, even in the most watered down version of GS. Also, when the original article argued for the reinstation of Glass Steagall they probably argued for it in its original non-watered down version.
As to your second statement, you said "Instead of speculating in "finance", lending went to speculate in "productive assets" like equities and bonds." To me this means that you misunderstood what the original article was trying to say. By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments.
By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments.
A direct loan to a business is, by definition, speculating on a corporate bond.
It sounds like a better approach then many regulations that lead to very little.
Are you suggesting that Reich is a racist because he sees this as a problem and wants to ensure that African Americans and Hispanics get employment opportunities ?
Whenever economists speak of jobs programs for everyone, not just "white male construction workers", this is what they're eluding to.
Closing the door is a Paraphrase.
Definition: http://en.wikipedia.org/wiki/Paraphrase