Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktOne of the elements of that storm was the partial repeal ofGlass-Steagall, coupled, however, with the partial repeal of the BankHolding Act [both in Gramm-Leach], and made deadly by the CommodityFutures Modernization Act of 2000 and the subsequent vacuum intowhich fell Enron’s “off the books” activities, the burgeoning ofunregulated credit default swaps backed by zero insurance reserve, andthe unregulated “securities” called collateralized debtobligations. See the various press releases from SEC, especially2001-2002, and their joint releases with the Commodities FuturesTrading Commission, to get the sense of “oh, wow, this is gonna begreat” that was pervasive.
Oneresult was government insurance of deposits in commercial banks thatcould then be leveraged in very risky and unregulated transactions. “What does seem impractical, however, are the current arrangements.Anyone who proposed giving government guarantees to retail depositorsand other creditors, and then suggested that such funding could beused to finance highly risky and speculative activities, would bethought rather unworldly. But that is where we now are.” MervynKing, Bank of England, October 2009.
Thereare other historical elements. When we gave Citibank thevariance – the “temporary” approval – to merge with TravelersInsurance years earlier in contravention of the existing Bank HoldingAct we were playing with this fire. When we began the incrediblebipartisan push for 100% mortgages to barely qualified borrowers wewere creating tinder to be fed into the unregulated CDOs that were inheavy demand because of a tidal wave of cash looking for a home. When FanFred participated in the Goldman-Sachs model of wealthcreation we further implicated the future governmental response.
Irecognize some compelling arguments for looking elsewhere. See
Again,consider the banks in western countries that were NOT shaken to theirroots, that were not crying for bailouts. “Canada’s experienceseems to support those who say that the way to keep banking safe isto keep it boring — that is, to limit the extent to which banks cantake on risk.” The dreaded Krugman, 2-1-10
Iconcede that is an argument for regulating risk taking, not forregulating the wall between “commercial” and “investment”banking, per se. However, the contribution from tearing down thatwall is that investment banking runs a far chancier, and more global,set of risks than is required for good lending practices. The set ofrisk averse regulations historically applicable to lendinginstitutions would stifle an investment banker. Even now we see theindustry fighting against maintaining mere ten per cent in reserves. I remember when 18% was typical for a local bank.
Ipose that separation would be a net good and reduce future risk inthe way suggested by Mervyn King.
Fora world class primer on line refer to:
This is conveniently found through the “baselinescenario” link on the right of your page.
I’m outta here! At least, for now. Hook ’em Horns!
Filed under: Uncategorized |
All Things in Moderation 
Mark:I definitely want to comment on this, but will have a busy morning. Hoepfully later this afternoon. I actually have a view that I suspect is going to be very controversial.
LikeLike
Mark:One quick question…between 2001 and 2010 (just to take an arbitrary 10yr period around 2008) how much did the FDIC take in on fees for deposit insurance, and how much did it have to pay out? That is, was taxpayer money needed as a backstop to make good on FDIC insurance, or did the system work?
LikeLike
Great post, Mark! I'm going to have to re-read it a couple of times and do some thinking since this is far, far outside my areas of expertise. I'm looking forward to you and Scott debating this!
LikeLike
BTW, Mark, great win over BYU last week (THANK YOU!!!) and stomp those Bruins! 🙂
LikeLike
I will have to comment as I am able, too. I haven't yet found the one report on this that I posted at PL (which of course cannot be searched in its new form!). Brad Delong is among those who rejected the G-S theory of the crisis.Here is an AEI overview that I think reviews the truth about what GLB did and did not do, although it is a bit convoluted. http://www.aei.org/docLib/10-FSO-October-g.pdfSeveral key points imo: GLB, in repealing parts of G-S, did not allow commercial banks to do anything they could not do before except affiliate with investment banks. They still could not engage in underwriting or dealing. But they could always buy and sell various securities, and, critically, their secured loan assets could always be securitized, and indeed were long before GLB. We know this. This leaves only the possibility that the affiliations allowed after GLB somehow led to the crisis, but the evidence simply is not there for this theory. More later.
LikeLike
I added links to the FCIC site and the AEI report discussing G-S.The vote on the FCIC report was 6-4, with the R appointees all dissenting. I think the report is poorly done in that it is written in a dramatic and political fashion, but I don't see the finger pointing at G-S in the majority or dissenting statements.
LikeLike
OT: I haven't even read the morning thread yet, and there's already 61 comments. That's what I'm talking about!As most of you probably know, weekends tend to be very busy for me and I missed most of the open threads on the Plum Line on weekends. I will try to check in, and do my duty as a fellow comrade in our glorious struggle against oppression, but weekends I may not be here as much. Feel free to email me directly, but I don't even check my email that much. ;)That being said, I'd like to start talking about when to take the blog "public" again, (we can always take it private, or constrain comments to blog members, if we don't like what's going on). QB mentioned private discussions among admins, so I think maybe we just make sure we all have each other's email addresses, and make a contact group in our various email clients so we can do private admin discussions via email.That's what I'm thinking. Maybe this should be another post, but I'm not likely to be checking back in until tonight. Anyway, love seeing all the action here after only a few days in existence. A robust and healthy newborn!Excelsior. See you guys tonight. For the first time, I think I'm actually not going to be able to read everything that people are posting. 😉
LikeLike
I see Bernie's here! Bernie, do a full blog post on something. You are no longer confined to the comments! Shine on, young man. Shine on!
LikeLike
Scott: "I actually have a view that I suspect is going to be very controversial."Not you! Perish the thought.
LikeLike
Sheesh that beach guy is a menace. The very definition of a Troll, he enjoys being reviled, he practically screams, "please, hate me, I need it like oxygen."Well two soccer games today. We're off. Scott I'll work on my crony capitalism paradox resolution post for tomorrow morning maybe; I've got it all lined out in my head now. Running is perfect for that kind of thing.
LikeLike
Drive-by: I believe repeal of portions of Glass-Steagall in the early 80s led directly to the S&L crisis. What do you think?
LikeLike
The questions I have are: How much attention does any of this get on Capitol Hill? What kinds of discussions do our elected representatives have on this?Or is the sum total of legislations/regulations limited to trimming in the most costly offenders a bit til the noise dies down?
LikeLike