banking

The Banking System isn’t getting better — it’s getting worse.

Having worked in finance for over half a decade, and now having been involved in high finance now nearly a decade, I’ve been exposed to now only the internal workings of how credit and finance works from the inside, but I’ve studied it extensively as a matter of interest, and I see a problem developing — some if it we all know about, the other parts, not so much.

While our individual finances are improving overall, I see a big problem developing with the same system that brought it down in 2007 — unregulated banking.

In the United States, from the 1700s to the early 1900s, there was banking crash roughly every 15 years.  With the institution of strong regulation, particularly after the Stock Market Crash of 1929, the United States entered a golden age of banking.

How can this be?  With over 100 years of 15 year booms and busts, why did it all of a sudden stabilize?  Regulation.  With strong, effective regulation, bank busts came to a halt.  Not a SINGLE widespread bank bust occurred for over FIFTY years in America.

While a majority of this process took place in the 80s and 90s, the arguable beginning was the Nixon Shock; a term attributed to the end of the Bretton Woods system in the United States, when Nixon unilaterally wrote off the US Dollar’s ability to be converted into Gold; the United States Dollar became a free-floating value currency, which caused the US Dollar to become a reserve currency in many nations of the world — massively increasing it’s value.  In the 1980s, this trend continued: deregulation became the buzz word.  With more risks, banks could make more money with the same hard cash in it’s accounts.

restore-glass-steagallThe most hardcore change, in my opinion came during the Clinton administration, when Congress approved the repeal of the Glass-Steagall Act of 1933, repealed by the Gramm-Leach-Bliley Act of 1999, signed by Bill Clinton in November of that year.  This VERY important piece of legislation turned banking regulation on it’s head: Glass-Steagall was an instrument that separated Main Street banks from Wall Street banks.  In english, this means regular depositor banks (such as Bank of America, or Huntington Bank or Chase Bank) could play the stock market and make investments with depositor money that it otherwise barred from doing under the 1930s legislation, just like Investment banks and corporations can and do.

Seen as a vestige of post-Crash and pre-/post-World War II stabilizing legislation, it was, at the time, seen as unnecessary.  However, when deregulation began picking up steam in the 1980s, things happened in short order:

- The 1980s and 1990s Savings & Loan Crises: Savings and Loan thrifts were given many of the same powers as banks under deregulation legislation signed by President Carter in 1980; without the same regulations banks were subject to.  With the massive take-off of real estate lending, (outstanding mortgage debt was $700 Billion-ish in 1970, and nearly doubled to $1.2 Trillion in 1980), S&L’s took massive risks by lending out more money than they should have, on top of rising interest rates caused many institutions to fail.  This was failure to such a degree the United States had never seen.

- Repeal of Glass-Steagall Act: With the S&L failures still fresh on the minds of financiers and politicians, many argued further deregulation was required to avert such a disaster in the future.  Congress passed Gramm-Leach-Bliley and it was signed by President Clinton at the twilight of his Administration.  By the end of the next Administration (G. W. Bush), only EIGHT years later. the United States was reeling from the worst banking and credit crisis it had seen since the dawn of the 20th century, and it was spreading throughout the world.  The FDIC began publishing lists of bank failures every Friday, conducting raids on banks it or the State controllers deemed in danger of failing, or already had, legally — and, for the first time in history, the FDIC, the Federal Depositors Insurance Corporation’s funds went NEGATIVE from insuring lost depositor money.

All of these took place within 25 years of the beginning of banking deregulation in the United States — AFTER an over 50-year golden era for banking in the United States where bank failure was almost unheard of, to the point where bank failures and bank runs were becoming regular weekly news events on Friday nights.

Even more disturbing, the largest four banking institutions in the United States, the four largest banks (Bank of America, Citigroup, JPMorganChase and Wells Fargo) are now THIRTY percent LARGER than they were in 2007!

How can the next banking crisis be softened, if not stopped?

- Reconstitute a Bretton Woods-like system for the American economy: peg it with something convertible to stabilize the possible future crash of the US Dollar.  This would, in general, lower the value of the dollar, however, the dollar would be safe from a crash, or other cataclysmic disaster brought on by a perceived lack of confidence in the American financial system, which is all that currently “holds up” the American economy and the value of the US Dollar.

- Reinstitute a Glass-Steagall Law.  Banks shouldn’t be allowed to gamble with depositor money.  When banks buy futures or invest in trusts or mutual funds with depositor money, it’s the same as taking it down to the Casino and betting on a three-of-a-kind.  In fact, I’d be willing to bet on a CASINO win, over futures and stocks, at the moment.

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