DISQUS

Jim · 1 year ago

aye!

Aaron Krowne · 1 year ago

It would probably be more useful to fully-reserve and collateralize any speculative activities rather than banning them outright. In this sense Glass-Steagall really missed the point.

The Fed began lowering and allowing bypasses of basic reserve requirements (yes, in retail banks) back in the early 90s, far before Glass-Steagall was repealed, as a gambit to help lift us out of that recession. It worked -- the economy failed to dip into recession in 1995, when most of the data implied this was inevitable.

Fed system reserves collapsed from around $80 billion in 90/91 to $40 billion last year (then plummeted to negative in this crisis). Obviously, with the economy "growing" the whole time, this meant a dramatically lower reserve ratio. Again, nothing to do with Glass-Steagall.

The downside of this quiet regulatory shift was that it launched us on the massive financial bubble we're now having to come down from.

Until the 60s, unit banking laws prevented banks from becoming diversified across economic regions, which was disastrous for bank stability (if you were limited to one state, and it was hit hard by a drought, your bank would be toast).

Business and geographic restrictions are not the answer... reserves and collateral are.

Remember, if you lend to a bank for an interest-bearing account, you are telling them you *want* them to be engaging in speculative activities, to some extent. There is after all no reward without risk. Saying which kind of lending is "bad" speculative is rather arbitrary.

[Of course, things are so extreme today, that non-interest-bearing accounts are also exposed to general bank failure, FDIC notwithstanding.]

If you don't want to be exposed to risk, put your money in a vault. People can't have it both ways.

Constantine von Hoffman · 1 year ago

You raise some very good points. I have not looked closely enough at the savings and loan collapse yet, but I suspect some of the groundwork for today's mess can be found there, too.

As far as risk goes -- it is not that Glass-Steagall was an effort to remove risk. Your point about the absurd geographic limitations is spot in showing how it actually increased some types of risk. But G-S was an effort to remove excessive risk caused by what happens when an institution has a fiscal incentive to get others to participate in its own risky investments. G-S was designed for a time when those others were the banks' customers and the investments were stocks. Today we have a situation where financial institutions had a clear interest in getting others to buy the bad mortgages they were making. Their profit came from the resale of these loans -- and their risk -- to others. Therefore there was a huge disincentive for them to do the due diligence that should have been done.

Miami Title Company · 1 year ago

Regarding the mortgages, if every borrower had to put 20% down, mortgages would have been much more stable and secure. In 2000-2002, maybe 5% of sales I closed had the standard 80% ltv. From 2003-2007, I think abut 90% of transactions I closed had 100% ltv, with one or two loans, regardless of arms. People gamble when they do not have to risk their actual cash.

I-Man · 1 year ago

No sale. Remember the last banking crisis in the 80s. Your analysis of what went wrong + where is illogical + just partisan. There is lots of blame to go around + IMO mostly with the Fed's (Greenspan) cheap money policy. Over-leverage. Inept regulations. Corrupt + incompetent politicians. Complex securitizations that ultimately no one fully understood the ramifications. Glass-Steagall is just a canard.