I thought I would try to make this as simple as possible: Here is my take on understanding the current financial crisis. All you need to understand is the history (and eventual repeal) of the Glass-Steagall and Bank Holding Company Acts.
Following the 1929 stock market crash, historic legislation called the Glass-Steagall Act was signed into law (1933). The Glass-Steagall act regulated the banking industry in several ways including, but not limited to, preventing banks from underwriting stocks, prevented banks from “engaging principally in” the securities business and created the FDIC to insure bank deposits.
In 1956 the Bank Holding Company Act was passed which prevented banks from engaging in non-banking activities, from buying banks in other states and prohibited owning insurance-underwriting companies. These two acts helped to control the volatile banking industry by establishing firm guidelines that banks needed to adhere to.
Starting in 1986 the banking industry begins to lobby congress to repeal portions of these acts. In 1987, they successfully repealed portions of each act. Now banks were allowed to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities.
In 1998 Sandy Weill and John Reed were attempting to undertake the biggest corporate merger in history by combining Travelers, Solomon Smith Barney and Citibank to create Citigroup. At the time, this was not legal.
Weill begins a public relations strategy to change the laws which prevented this merger. In May of 1998, he was successful and in late 1999 the Glass-Steagall act was completely repealed. This led to a ballooning industry of Mortgaged backed securities, investment derivatives, oil price speculation and reinvestment of bank deposits.
I don’t think this crisis is all that confusing. Bankers pushed for deregulation, the deregulation led to massive speculation and created an artificial bubble which we’ve now seen burst.
The real question is, why are we now bailing the banks out? They made the gamble, they should live with the results.
Here is a very good longer description of the Glass Steagall Act.
2 responses so far ↓
1 Nick Kwiatkowski // Dec 11, 2008 at 10:41 pm
Why did we bail them out? Is it something to do with many of our congressmen are tied to the banking industry? Is it that a lot of their money is tied up in the stocks that was loosing value? Does it have something to do with the chain of power?
They made a gamble and they lost the bet. In my eyes, the only ones that are allowed to do that is the government itself (because it is the will of the people). The will of the people did not want the bailout (look at all the protests that happened leading up to the bailout).
Personally, I think that any business that made a big gamble should be allowed to fail. If LiquidWeb decided to go into the potatoe farming business, and it lost money, it was a gamble. Sure, people loose their jobs if that happens, but in the end, if there was a bad gamble, they would loose there jobs anyway (think: they would merge or get bought out, reducing headcount).
2 Ric Stoliker // Dec 25, 2008 at 7:20 pm
The banking industry and “Wall St.” are just the canary in the coal mine. The failure of our economy is a symptom of a much greater illness…which is the decline of the middle class and the crushing tax burden of both federal and local governments. People work for a good third of a year if not more to pay their tax obligations. Add in the dirth of well-paying jobs…especially for non-college grads and you have a perfect recessional storm. No one would care about ARM’s if they could pay them!!! The difference between a sub-prime mortgage and a 30 year fixed is probably less than 8% and thats deductible!! The average American home costs over $240K…add rising utilitys,property taxes,insurance and $25k automobiles…uhh no wonder middle class people have fewer and fewer children!!! America is social darwinism in reverse…drop out of high school and have an illegitamet child…u’ll get free day care…college tuition help..subsidised housing etc etc. Finish high school….work all day…pay ur own way…the amount of “aid” U will recieve…uhh try zero!! Its the fact that we have 325 million people now….porous borders….60% drop-out rates in the inner cities…free trade suicide…an in-experienced pres.-elect….a delusional imperialistic foreign policy…and one monolethic politcal party…the GOP and the Happy face republicans (aka the democrats) and anyone can see that this story has but one ending…total collapse…I’m only shocked at the speed of this avalanche..not that it IS happening. The TV show that rebuilds peoples homes…the name escapes me…came here (Bridgeport CT) last year…a woman on disability with four teens…two just about ready for college…the show competely re-did her home…turned it into a show place..although it was still in the ghetto. What did the city do…a city with a 100% democratic common council and mayor…not a republican in site..they raised this womans property taxes from $3,500 a year to over $12,000 a year!!! No faze in….all in one year. The point of this story….already politicians of both parties..but more often dems are raising taxes to make up for income short falls…caused by this recession!! From Obama on down…no leadership…no compassion…no plan. Banks and brokers are doing what they are supposed to do…make money…its the government which has failed.
You must log in to post a comment.