As a Democrat who works in financial services, I’m used to people looking at me like I’m crazy, especially those in both respective groups. From my perspective, it makes complete sense as Democrats are the most likely to advance common sense regulation (which creates a level and stable playing field for all competitors) and set tax policy that reduces income and wealth inequality, increasing the middle class and increasing the market of consumers to which I have access.
In short, I do better when EVERYONE in this country does better and when my competitors have to play by the same rules.
Over the last few years, I’ve grown increasingly uncomfortable because the ultra left and the ultra right are matched up perfectly in their complete demonization of everyone in financial services and of the industry. During the debate, I watched two candidates say that all of Wall Street was built on fraud and nothing could be further from the truth… it’s painting everyone in the industry with a broad brush that, quite frankly, isn’t deserved.
So, let’s go over a few things…
1) Leading up to the collapse in 2008, some of the banks and traders committed what would be called fraud by constructing and selling securities they knew were bad.
2) Some of the larger investment banks borrowed FAR in excess of their capacity. Some of them went bankrupt or were sold for less than book value, while others who had collateral received loans. Lehman Brothers, for example, had a balance sheet composed of roughly $26 billion in equity floating $689 billion in assets. As a general rule, you would want at least 10% of assets as equity, or $68.9 billion which means LEH was SEVERELY undercapitalized.
3) Federal programs to assist banks with capital infusions WERE repaid. Taxpayers are not out any money on capital assistance, they did lose on assistance to homeowners which was part of TARP.
4) There were a number of federal and commercial programs designed to help homeowners. Some of these still exist and allow homeowners to refinance at loan to value ratios far in excess of what a company would be able to do.
5) Glass Steagall’s repeal DID NOT cause the financial crisis, nor did it meaningfully make it worse… those risky investments were all rated TRIPLE A and banks were trading those before the repeal of G-S.
6) The Great Depression would not have been prevented by Glass-Steagall. The collapse of the stock market hurt, but not enough to collapse the economy as a whole. What did that was the Fed’s decision NOT to increase liquidity in the banking system which caused runs, which in turn led to the collapse of large numbers of banks, and completely froze credit in the United States. Without that credit, companies couldn’t finance operations and consumers couldn’t buy.
7) The economy is dependent on the financial system… think of it as the circulatory system of the economy. Through it’s arteries and veins flow the credit and cash to keep the economy growing.
These are written as statements of fact because they are true. It’s ridiculous to debate them, and I seriously doubt either Mr. O’Malley or Sen. Sanders would. Even Senator Warren would not
debate point five
Warren, meanwhile, confessed to New York Times reporter Andrew Ross Sorkin that Glass-Steagall would probably not have stopped the financial crisis, but that she was pushing to reinstate it because, in Sorkin’s words, “it is an easy issue for the public to understand and ‘you can build public attention behind.’”
The simple truth is that Glass didn’t keep us safe, what kept us safe was an active Fed, a post-World War 2 boom, and tax policy that incented investment over speculation. When President Carter kicked off deregulation of the S&Ls with DIDMCA and President Reagan effectively ended oversight, it was all within the Glass framework. In short, G-S existed almost 20 years after deregulation started and it did nothing to stop, for example, the S&L meltdown or any of the other problems we had between 1980 and 1999 in financial services.
As further evidence of the ridiculous idea that simply separating investment and commercial banking will eliminate risk, keep in mind that we’re the only ones that did it. In the rest of the world, such separation is rare.
So, if not the restoration of Glass, what then can we do? Well, the two primary factors in the collapse were
1) Securities that were rated far higher than they should have been and were shoddily constructed (sometimes intentionally).
2) Leverage was far in excess of any sane measure, though this was primarily in the investment banks.
Cure for these things and we can prevent future collapses or, at a minimum and more likely, make the next collapse far smaller and less systemic. Implementing point one, especially by creating a fiduciary duty between salesman and customer, would allow us to send people to jail. Add in what already exists, a prohibition on the use of insured deposits to speculate, and you have a regulatory framework that’s not only flexible but lasting.
Please bear in mind I work in the industry and have been through recessions and expansions, under various regulatory mechanisms, and have always made money. Whatever happens with regulation after January, 2017, I will still make money. My point in writing that is to show that my best interest won’t be effected by what ends up happening after January, 2017. I do care about the overall health of the US economy and feel it necessary to tell everyone who is invested in the restoration of Glass that it won’t do what you need it to do. It’s time to wake up and focus on pragmatic solutions that will give us a solid financial system rather than boilerplate nonsense and false security.