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.