The Glass Broke

 Scrambling to deal with the Great Depression begun in 1929, Congress enacted the Glass-Steagall Act in 1933 to control future damage and avoid future depressions. Initially the Act created a firewall between commercial and investment banks; later it was extended to separate banking from insurance companies. Rampant speculation by banking and investment companies were essentially blamed for the depression. Speculation, however, comes in many guises and Congress made several attempts to curb those practices before they caused even more national financial woe.

Leaders of the banking, investment and insurance industries, of course, held differing views of the Glass-Steagall Act. They chafed at the controls and complained their ability to create new services for their customers threatened reasonable expansion of the economy.

After many decades of successful control, political forces in the late 1990’s grew to a fevered pitch. Finding a successful bridge between the Democrat and Republican leadership in Congress, President Clinton’s administration brokered the deal which repealed the Glass-Steagall Act and replaced it with the Gramm-Leach-Bliley Act in November, 1999. The GLBA essentially removed the firewalls separating the banking, insurance and investment industries. Controls were modestly provided to prevent excesses.

Or so they thought at the time. From late 1999 to late 2007, the industries interacted freely and expanded their reaches significantly. Insurance companies bought investment brokers; banks bought investment houses; investment banks bought commercial banks, and so on and so on. Pretty soon it was difficult to distinguish one industry from the other because they grew together as a tangled mass.

During the eight years of the George W. Bush presidency, free market theology was touted broadly and practiced. Profits soared as speculation risk grew. When real estate was added to the mix everything went kerblewy ~ a technical term few are familiar with!

Essentially, common wisdom held that real estate values generally increased over time, rarely did they decline, and only then temporarily. Thus mortgages became less a credit instrument and more an investment instrument. When that step of logic was partially digested (that is, no long-term consequences were thought out) commercial banks, now also investment banks, conjured up the mortgage investment product, packaged it and sold it to investors. At first this was regional in the United States, then national. As homeownership soared, more buyers were included in the risk pool and mortgage demand soared to the moon! To provide the liquidity for these mortgages, packaged mortgage investments were sold globally. Everyone wanted in on this golden market! Even Europe and Asia.

Trouble is most forgot Newton’s Law: what goes up must come down, eventually.

When homeowners encountered the beginning of the 2007 stagnant economy, which then led to the contracting economies of 2008 and 2009, mortgage delinquencies grew into defaults and foreclosures; so many in fact that the real estate market entered its history making value decline. With that came investment defaults, banking defaults, and the collapse of the American economy.

Machinations of these industries aside, greed was the primary cause of the near collapse of the financial system. Regulations were removed so greed could re-enter the market place uninhibited. Then what little regulatory power remained was laxly used and greed had the fast track to personal wealth at the cost of the entire system.

We don’t hear much about this because the ideologists of the political parties want us to believe that this is all about the evils of the other party. Nonsense, bosh and rot! It is about American greed run rampant and it is the base reason why government regulation is needed in the first place. Perhaps that conclusion is uncomfortable to some; but it is a reality we all need to face. Some of us are scoundrels. Many of us are greedy. Most everyone can fall prey to the blindness that allows greed to pervade our own actions throughout society.

But we must stop this nonsense from creating further irreparable damage.

Congress needs to reinstate the Glass-Steagall Act provisions. The public must stop listening and believing in ideological clap trap and do the hard work of learning facts and discerning cause-effect-result of public policy. The fox is in the henhouse and has been for many years.

It is time to protect the chickens. Write or phone your congressman and demand action today.

October 8, 2011