Tuesday, November 13, 2007

How to keep the whacked-out Bush Administration's free enterprise purists from plunging us into the next Great Depression


Suppose you went to the bank to take out some of your money and learned that you couldn’t get it. Not today. And not ever again because the bank was broke.

That’s what happened in the Great Depression of 1929, and it’s one of the factors that helped make the Great Depression so “Great.” Thousands of people lost not only their jobs and their homes, but also their savings.

Could it happen here again? Before you answer, consider this appalling tale:

The brat who destroyed a bank

In 1995, a 27 year old whiz kid with too little supervision and too much responsibility brought down an international London merchant banking company that had been doing business since 1762.

The bank was Barings and the whiz kid was a too-smart-for-his-own-good trader named Nick Leeson. Before he got tangled in his own elaborate financial knitting, a bizarre scheme involving markets in London and Singapore, a bit of arbitraging and a bit of financial fudging, he had managed to lose $1.4 billion of the bank’s trading capital. Another bank snatched up the chaff that was Barings for about two bucks.

The Bank of England tried a rescue attempt but failed. Employees around the world lost their bonuses, their livelihoods and in some cases their ability to retire with any degree of security.

As for Leeson, he did okay. After doing six years in the clink, he wrote a book called Rogue Trader that sold to the movies. Hey, it’s hard to keep a good story down.

So what’s this got to do with
your future? Pal, take a deep breath,

bite hard on a stick and listen up.


This country used to have a law called the Glass-StiegelAct. It was one of those laws that closed the barn doors after the horse got out, but at least it kept the barn door closed against future financial disasters.

Glass-Stiegel, signed into law after a long string of bank failures, prevented banks from doing stock brokerage business, or stock brokers from doing most forms of banking business. What I’ve just said is admittedly something of an oversimplification, but the principle of this law was to compartmentalize America’s financial institutions.

Think of it as a giant ship called The U.S. Economy. If the ship springs a leak and there’s only one huge compartment below, the ship is going to sink. But if there are lots of little compartments in the ship and one of the compartments springs a leak, the ship still will be able to make it back to shore.

Poking holes in the life boats

Alas, starting in the 1970s Congress started undoing Steigel Glass, essentially taking the compartments out of the ship’s hold, and poking holes in the life boats while they were at it. This was initiated by people who knew more about Ayn Rand’s brand of free enterprise fiction than they did about real financial history, and by bankers and brokers with influence, who saw a short term opportunity to make a bundle through mergers that would put them in two or more businesses instead of one.

The result is a banking system that’s a disaster waiting to happen. You don’t even need a super subprime mortgage meltdown. All you need is the next Nick Leeson, suffering from the same kind of gambling fever that drives people to keep plunging quarters into Las Vegas slot machines until their pockets are empty. When an event like that does happen to an American bank, it will bring down not only banks, but also the U.S. Economy.

Imagine being insured by

a bankrupt insurance company


How can a giant bank’s failure impact the U.S. Government and all of us taxpayers? Here's how:

Bank deposits up to $100,000 are insured by the Federal Government. If a bank with deposits of, say, $500 billion goes down, it’s the taxpayers who have to pay off the depositors.

That’s the kind of money the U.S. Government doesn’t have on hand, thanks to the insane Bushonomics theory that you can start a war, cut taxes at the same time, and drive the deficit into the trillions without horrible consequences. It’s like being insured by an insurance company that’s essentially broke

When a giant bank failure eventually comes, the U.S. Treasury will be forced to print money even faster than it’s printing it now to cover the insurance payments. When that happens, the value of your money will shrink, and the government will be forced to raise interest rates to attract borrowers. This will result in a cost of everything that’ll make today’s prices look like chickenfeed, followed by a national economic collapse.

In pre-Nazi Germany, inflation of this kind literally led to people taking a wheelbarrow full of money to the grocer for a loaf of bread, and eventually led to the rise of the Nazis.

Hiding the disaster potential

The potential disaster in the United States is masked by the fact that the government hasn’t hiked the FDIC insurance rate in decades. Today, that $100,000 limit is the equivalent to only $10,000 a few decades ago.

So if you can’t stash your cash in the bank, and you want to keep it safer, what can you do? Some people are buying gold, which has inflated in price nearly 300 percent in less than 10 years.

But there are risks in buying gold, too, not least of them the risk that I’m wrong about all this.

At any rate, the purpose of this post is not to encourage you to buy gold, but to encourage you to demand financial reform. The USA needs to bring its finances under control by ending the war and by restoring tax brackets that deserve to go into the 50- or 60 percent bracket for individuals with incomes in the millions and above, and into the 90 percent bracket for individuals with triple-digit millions in annual income.

And once that happens, we’ll need FDIC insurance up to $1 million per depositor, not a paltry $100,000.

13 comments:

Alan said...

You are absolutely right about the very dangerous consequences of the repeal of the Glass Stiegel Act, as well as the repeal or lack of enforcement of other New Deal measures that protected our economy and consumers for the last several decades. The most recent example is the repeal in 2005 of the Public Utility Holding Company Act of 1935. These laws were passed to prevent the recurrence of economically disastrous activities of banks, utility companies and others that led to the Great Depression Over the last several years, they have been derided as antiquated statutes that strangle the economy. In reality, they were providing needed restraints on corporations that left to their own devices and driven by their own greed could destroy our present economy just as they did in 1929. This is precisely what we are witnessing today.

Traveling Mom said...

You had me up until the million dollar FDIC. How does that help? It seems like it puts the government - no strike that. It is never the government, it is always the taxpayers! It seems like that would just extend the liability the tax payer has to cover when the CEO who took a 22 million dollar bonus in June, drives the company into Chapter 11 by September. (That was Lehman CEO for those who don't recognize the package) Isn't the problem that too many "free market capitalists" expect the taxpayer to soften the landing?

Glenn said...

Don/t forget to include it was Clinton who repealed the act. And Obamma has two Fanny and Freddy Exc's working for him, and Lehman brothers gave all the money to Hillary and Barry's campaign

David said...

You kindly left out who repealed Glass-Stiegel.

And who's employee, Franklin Raines, went on to run Fannie Mae (and who Fannie Mae and Freddie Mac contributed to while the were getting those fat cats fatter).

And what happened to Franklin Raines?

And where does he work now?

I'm just sayin'....

David said...

You kindly left out who repealed Glass-Stiegel.

And who's employee, Franklin Raines, went on to run Fannie Mae (and who Fannie Mae and Freddie Mac contributed to while the were getting those fat cats fatter).

And what happened to Franklin Raines?

Orca said...

One little problem with your premise that Bush caused all this. I will grant you he certainly did nothing to avoid these problems neither did the Republicans when they ran the show last and Democrats are acting like they just showed up at the accident. They have done nothing at all in the past two years to avoid these problems except lead the charge to the contributions window at Fannie and Freddie. Give me a break!

Before the lefties jump on me, let me get the whole sentence out first. In 1996 this act was repealed by William Jefferson Clinton with, yes, the approval from the Republicans. NO one is safe from blame.

The Bob Dole wing, the Bush 1 wing, the John McCain, Charlie Crist, I-am-really-a-democrat masquerading-as-a-republican wing had managed to destroy Newt Gingrich and beat back the intelligent reforms that gave Clinton and the Democrats their bragging claims to the 90's economy. As begrudgingly as Clinton agreed to the last real reforms authored by Republicans against hysterical democrats, I will begrudgingly give Clinton credit for being smart enough to recognize how intelligent the reforms were. I give him credit for being crafty enought to take credit for them.

Do not be ignorant with this issue. It is too important to cling to party loyalty. No one can intelligently claim that one party or the other alone is to blame, they both participated in the carnage.

The focus of this election should not be on whether "your team" wins but should focus on whether we are ready to complete the destruction of the capitalist economy we have so richly employed. Are you ready to admit that you cannot take care of yourself without Barrack Obama as your daddy or nancy Pelosi as your mommy? Or, the other people running to be elected our parents?

Come on america lets peal the diapers off, stop acting like spoiled children and pay attention to your own life and leave mine alone!

The democrats have deluted themselves into believing that they won the last election because people have fallen in love with socialism. The truth is republicans were thrown out of office because they too ...had fallen in love with socialism and all of its follies.

New York Crank said...

Nice try, Orca. I love your irrational rant, including this:

>>>> I will begrudgingly give Clinton credit for being smart enough to recognize how intelligent the reforms were<<

Right, I can see exactly how intelligent the reforms were. The economy's in the toilet, the banks are collapsing, the taxpayers will be on the hook for trillions before this is over, the U.S. Government will be printing money hand over fist, and your dollar just might buy you a quarter of a slice of bread. Assuming, of course, that you're not on a bread line.

A "free market" is not a market. Markets are orderly. A free market is the wild west without a sheriff, where nobody's safe. Not law abiding citizens. Not innocent bystanders. Not the outlaws either.

I say regulate, regulate, regulate. And then stringently police the regulations to make sure they're followed. Even John McCain, the anti-regulation guy, has had a sudden epiphany,and now suddenly wants to regulate — assuming you can believe anything he says any more.

The problem isn't law and order, which you libel by calling it Socialism. The problem is the free market fantasy that if only we had no government, we'd all be safe.

Very crankily yours,
The New York Crank

New York Crank said...

Nice try, Orca. I love your irrational rant, including this:

>>>> I will begrudgingly give Clinton credit for being smart enough to recognize how intelligent the reforms were<<

Right, I can see exactly how intelligent the reforms were. The economy's in the toilet, the banks are collapsing, the taxpayers will be on the hook for trillions before this is over, the U.S. Government will be printing money hand over fist, and your dollar just might buy you a quarter of a slice of bread. Assuming, of course, that you're not on a bread line.

A "free market" is not a market. Markets are orderly. A free market is the wild west without a sheriff, where nobody's safe. Not law abiding citizens. Not innocent bystanders. Not the outlaws either.

I say regulate, regulate, regulate. And then stringently police the regulations to make sure they're followed. Even John McCain, the anti-regulation guy, has had a sudden epiphany,and now suddenly wants to regulate — assuming you can believe anything he says any more.

The problem isn't law and order, which you libel by calling it Socialism. The problem is the free market fantasy that if only we had no government, we'd all be safe.

Very crankily yours,
The New York Crank

E'nana'hwe said...

Are any of you aware that the Glass-Steigel Act was repealed in 1999 under Clinton.

Rubin, who was Clinton's Financial guy, was also central — Democrats more than Republicans in a lot of ways with the Clinton Administration — in getting rid of Glass-Stiegel, was the old restriction that the banks couldn’t tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It’s all mixed up together.

BTW - Who is Obama's Economic Advisor??? You got it...Rubin! The man with the pulse on bailouts and breaking the Glass-Steigel Act.

E'nana'hwe said...

Are any of you aware that the Glass-Steigel Act was repealed in 1999 under Clinton.

Rubin, who was Clinton's Financial guy, was also central — Democrats more than Republicans in a lot of ways with the Clinton Administration — in getting rid of Glass-Stiegel, was the old restriction that the banks couldn’t tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It’s all mixed up together.

BTW - Who is Obama's Economic Advisor??? You got it...Rubin! The man with the pulse on bailouts and breaking the Glass-Steigel Act.

We, as a people, need to fight back. The financial institutions aren't being bailed out - their greedy gambling CEO's are. And this situation is going to get a LOT worse.

New York Crank said...

Yes, it happened during the Clinton administration, e'nana'hwe. Past that, you've got your facts a leeeeetle bit screwed up to avoid the whole truth.

The Secretary of theTreasury and the President don't pass legislation. The Congress does. And the Congress was Republican — you remember, those lovely guys who impeached Clinton?

By the way, e'nana'hwe — I love that name. Aren't you the guy who keeps writing me from Africa offering me 20% of some dead millionaire's fortune if only I'll send you my bank account numbers?

Keep trying to con me, dude. But I ought to warn you, it just won't work.

Yours very crankily,
The New York Crank

New York Crank said...

Yes, it happened during the Clinton administration, e'nana'hwe. Past that, you've got your facts a leeeeetle bit screwed up to avoid the whole truth.

The Secretary of theTreasury and the President don't pass legislation. The Congress does. And the Congress was Republican — you remember, those lovely guys who impeached Clinton?

By the way, e'nana'hwe — I love that name. Aren't you the guy who keeps writing me from Africa offering me 20% of some dead millionaire's fortune if only I'll send you my bank account numbers?

Keep trying to con me, dude. But I ought to warn you, it just won't work.

Yours very crankily,
The New York Crank

tcarter said...

Friends... I propose a different origin of our current financial crisis. However, I will rely upon another trusted advisor in economic matters, Congressman Ron Paul. One of these days, I will be able to speak intelligently on these topics... or at least be able to comment without hurting myself.

Todd

--- Begin Congressman Paul

Dear Friends:
The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.
The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,


Ron Paul

September 26, 2008 2:25 AM