Fixing Some Economics

Sandford Weil, the past guru of CitiCorp and the growth master of that corporation, now says it is time to break up the large banks. He believes this will save taxpayers money, like in avoided bailouts and the like in the future. I think he is right.

Coming from Sandy Weil, the observation is more than a little ironic. Weil long ago realized that banks could only grow their balance sheets if they were allowed to own insurance companies, own investment brokerages, too; and begin to do business crossing those two industries with the banking industry. To make this happen some government regulations had to disappear.

So in 1999 after several years of bantering and faux arguments among republicans and democrats, congress congealed (is there a better term out there?) to arrive at a decision to repeal the Glass-Steagall Act. Glass-Steagall expressly kept investment brokerage operations separate from both banking and insurance operations. And vice versa for all three of the industries. It was a major piece of legislation following the horrors of the Great Depression.

Think about it. Separated, bank deposits could only leave the banking firm to buy investments, purchase insurance; those withdrawals reduced the size of the bank’s balance sheet. However, if the bank became a holding company and owned a brokerage and insurance company, the money switched pockets but remained on the balance sheet of the holding company. Meanwhile, the bank holding company increased by the holdings of both the insurance and brokerage firms, expanded the bank’s business exponentially.

So, Glass-Steagall was made to go away. Congress agreed. So did the Clinton White House. That turned out good for Clinton and the Congress persons at the time.

Afterward the economy went nuts. Expanded. By leaps and bounds. Banking firms couldn’t buy up competitors fast enough; also bid up pricing on investment brokerages, insurers, too; the whole financial industrial complex took on a new shape. Enormous growth. And deals were made every day just to keep up.

Loans, too. Those were major growth products. The economy witnessed new companies, technologies and industries. Employment soared. So did incomes. So did taxes. So did sweet deals. Until, that is, the bill came due for all the excesses. A bubble of humongous size was building.

Then balance sheets became hungry for more cash, that is unencumbered balances of cash for transfers and transactions; new investment products were created. These took the form of bundled mortgages, bundled loan products of all sorts. They were sold as investments to willing buyers, usually banks and investment houses looking for opportunities for hungry investors. When that ran out they turned to international markets. That’s how Europe got roped in. Big banks sucked up a lot of the American investments with the assumption that it was insured by the USA government, and came with a good reputation. JP Morgan/Chase? Bank of America? Citicorp? Such grand names with solid credentials. Surely they wouldn’t sell us junk?

Well, in some cases they did. And as the American house of cards collapsed, so did Europe’s.

Now do you understand how the current mess got started and continued on for some time? And also, in its complexity, why it has been so difficult to repair the damage?

Who was in charge during this time? The White House was George W. Bush’s political fort. Congress was his personal power group. You know the rest. With favorable tax treatments and lax regulatory supervision, there was no way to avoid a lack of policing the miscreants. After all, they were all players in the same game. Hard to believe, but true.

So now we have the job of fixing the mess. Who’s on first base? Barack Obama. Did he make recommendations and proposals for repairs? Yes he did. And after partisan squabbles most of those short term proposals were approved. Not without changes, but at least they came into being and did a lot to remove immediate pain and dissolution of our financial system.

Of course, the good was apportioned to republican politicians; no blame was assigned to Bush; and the continuing hard times are all laid on the shoulders of the current President.

After Obama attempted to get bipartisan support going forward, the republicans in the house and senate stonewalled him. Stalled for time. Then the mid term elections gave power of the house back to the republicans. This was a major loss to the President’s strategy. Although he should get high grades for trying to put partisan politics behind us, the republicans would not let that happen.

So, ever since the time of the mid term elections, republicans have hollowed out all of Obama’s proposals, or flat out refused them, The Senate remains the only reasonable political body in Washington DC, but that is weakened by the arcane policy of 61% required for passage of anything in dispute. Sick. Disgusting.

The government does nothing. Because it is unable to get past its own road block of partisanship.

How do we get beyond this point? There are only two primary strategies to pursue. I’ll share those with you in the next posting.

July 28, 2012