Friday, April 6, 2012

Glass-Steagall MMMMM, Glass-Steagall MMMMM

This is the initial post for a new blog dedicated to analyzing some of the more curious delusions afoot. A little Googling--or listening to talk radio--and anyone with an interest in the causes of the recent recession will hear a near monk like chant designed to insinuate that the 1999 Clinton era legislation known as Gramm, Leach, Bliley bears heavy responsibility for the event.

The Gramm-Leach-Bliley Act of 1999....Along with other deregulation... allowed for the rise of giant national banks with large investment banking arms, as well as a host of other dangerous plays, from derivatives to the rise of the shadow banking system. The result: A huge speculative bubble, the resulting Great Recession and the near collapse of the world economy.
There's a direct line between the repeal of Glass-Steagall in 1999, led by Bill Clinton, Bob Rubin and Phil Gramm, and the near collapse of the financial system in 2008.
It's clear now that the crash of that day [Oct. 29, 1929] was not the beginning of the Great Depression but its loudest symptom. Other areas of the economy had been faltering for years and income inequality was near record highs, but this was cloaked by the mania on Wall Street, back in the day when banks could engage in highly speculative trading.

Of course, that toxic environment was rekindled in our time by the repeal of the Depression-era Glass-Steagall Act in 1999, and we got just what the reformers of the 1930s would have feared.
The above are merely a small sample of assertions made by one lonely Seattle Times columnist (Jon Talton, who couldn't even write about Tiger Woods marital problems without mentioning Glass Steagall).

Even when confronted with a friendly e-mail linking to arguments demonstrating that 1. Glass-Steagall hadn't actually been repealed, and 2. The changes that had been made by the 1999 legislation didn't have anything to do with mortgage backed securities, Mr Talton found it impossible to cope; claiming that it was only right wing ideologues who believed that.

Which would be news to left-wing economists (and former Clinton Administration officials like Berkeley's Brad DeLong and Alan Blinder) who are on record as follows;
Joe Stiglitz thinks that the investment bank culture took over the commercial banks. I think that merging investment and commercial banks gave investment banks more stability in their liabilities that allowed them to ride out the storm more easily.

Alan Blinder agrees with me, which makes me happy.

...“Banks did terrible things, investment banks did terrible things, a big insurance company named A.I.G. did terrible things, but basically none of that was enabled by the repeal of Glass-Steagall,” said Alan Blinder, an economist at Princeton, who had his share of confrontations with Summers when he was a member of the C.E.A., in the first two years of the Clinton Administration. Brad DeLong added, “To say that the breaking down of the Glass-Steagall wall between investment banks and commercial banks was the source of the current crisis is just wrong”
One of the reasons why it is 'just wrong', is that what is popularly known as Glass Steagall is actually the Banking Act of 1933 which had at least 32 provisions, most of which still being in place. There had been numerous proposed pieces of legislation regarding banking in the early 1930s from Senator Carter Glass and Congressman Henry Steagall that failed to be passed into law. Some of those provisions were incorporated into the 1933 bill signed into law by FDR, hence, apparently, how it came to be referred to as Glass-Steagall.

The bill was probably founded on a misconception; The Real Bills Doctrine that held that banking should be concerned only with providing liquidity for legitimate business transactions not for 'speculation'. It apparently not being realized then that legitimate business activity IS speculation.

Henry Ford 'speculated' that the public was eager for inexpensive private transportation. William Boeing 'speculated' that there was a market for air travel. Bill Gates III that personal computers would sell and need an operating system and software applications. Howard Schultz believed that the American public would embrace Italianesque coffee shops selling high quality brewed beverages....

Not to mention an uncountable number of entrepreneurs no one ever heard of because their speculations proved to be wrong. All of whom required financing to move their products through time and space to be available to customers.

Which is why we have a financial services industry. Yes, people attempt to profit from that need, and sometimes do so unethically, if not illegally. Politicians being no exception, in their quests for campaign contributions and votes. None of which demonstrates that Gramm, Leach Blilely (whatever motivated the bi-partisan coalition that produced it) had anything to do with 'causing' the 2008 financial meltdown.

Sometimes we have to do that which is very difficult, said the physicist Edward Teller, 'Sometimes we have to think.'

More to follow.

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