I have read 5 or 6 books on what contributed to the financial crises and I agree with much of the free market assessment including the major culpability of Alan Greenspan, the rating agencies and the political pressure on FNM and FRE. However where I part company with the free market apologists is on some of the deregulation, that it seems contributed greatly to the magnitude of the crises. I would like someone to explain to me how rescinding the Glass-Steagall and allowing Wall Street investment banks to play fast and loose with formerly guaranteed deposits was a good thing. How did Henry Paulson's political connection's resulting in Wall Street's leverage ceiling going from 12 to 1 to 30 to 1 add to financial stability? We need to go farther back to Enron's collapse after Wendy Gramm's stewardshiip at the CFTC eliminated regulation of derivatives; a situation that continued through the housing bubble.
Thomas Paine:However where I part company with the free market apologists is on some of the deregulation, that it seems contributed greatly to the magnitude of the crises.
The use of apologists won't get you far here.
Thomas Paine:We need to go farther back to Enron's collapse after Wendy Gramm's stewardshiip at the CFTC eliminated regulation of derivatives; a situation that continued through the housing bubble.
Actually, you need to go back to Long Term Capital Management. You need to go back to the S&L crisis. You need to go back to the end of Bretton Woods, FDR's confiscation of gold, the establishment of the Federal Reserve, and the First and Second Banks of America. You need to go back to the Constitution, which proposed legal tender.
If you find something evil that wobbles, push it. - Gary North
Also wanted to say, if you're not for free markets, then you are for monopoly. So I suppose the opposite of a free market apologist, is someone who defends regulation (privilege) which would be monopoly apologetics.
It is really as simple as that. You're either for freedom, or you are not.
Thomas Paine: I have read 5 or 6 books on what contributed to the financial crises and I agree with much of the free market assessment including the major culpability of Alan Greenspan, the rating agencies and the political pressure on FNM and FRE. However where I part company with the free market apologists is on some of the deregulation, that it seems contributed greatly to the magnitude of the crises. I would like someone to explain to me how rescinding the Glass-Steagall and allowing Wall Street investment banks to play fast and loose with formerly guaranteed deposits was a good thing. How did Henry Paulson's political connection's resulting in Wall Street's leverage ceiling going from 12 to 1 to 30 to 1 add to financial stability? We need to go farther back to Enron's collapse after Wendy Gramm's stewardshiip at the CFTC eliminated regulation of derivatives; a situation that continued through the housing bubble.
Hello, this financial mess is very complex and many questions must be answered. With regard to leverage, where did the bank get the leverage from? The main answer is from fractional reserve banking through the Federal Reserve. Also, the repeal of the Glass-Steagall Act did allow financial institutions from making stupid decisions, but it must be pointed out that the money they used to make the stupid decisions came from the Federal Reserve. Furthermore, many governmental and Federal Reserve policies encourage the financial institutions to make these stupid decisions.
Furthermore, there was the moral hazard that had been created by the bailout of financial institutions in the past. Everyone in the financial comunity knew that the government would bail out FNM and FRE if FNM and FRE screwed up, and the same was true of many large, politically-connected financial institutions, such as Goldman Sachs. With regard to the Glass-Steagall Act, it didn't cause the bubble. It simply allowed financial institutions to make highly risky decisions with their money; the repeal itself didn't force them, nor encourage them to do so. What encouraged them to make highly risky decisions was, in part, the moral hazard that the government created by bailing out financial institutions in the past.
Btw, government controlled FNM and FRE were leveraged over 130 to 1.
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Anyway, that insane leverage and excessive risk taking was exactly what regulator wanted and encouraged. The regulator had the power to stop that if that was the intention.
I'm assuming you mean the Banking Act of 1933 which primarily separated commercial/investment banking and made the FDIC. I hope that you realize the FDIC wasn't repealed (unfortunately) and more so that you realize that guaranteeing deposits makes savers not care where their money goes and allows the banks to engage in reckless behavior.
The Gramm-Leach-Bliley (correct me of I'm wrong on the spelling) Act of 1999 simply allowed commercial and investment banking to be mixed along with some other adjustments. So if a commercial bank decides to begin underwriting securities or an investment bank wants to accept deposits, and if they fail miserably, then they go bankrupt. Well, what's the issue? The issue is simply that the banks could engage in greater risk by engaging in both sectors of banking without the consequences because of the fascist Federal Reserve System and the FDIC.
Picture a real free market, without a Fed/FDIC. Now of course, banks could engage in commercial/investment banking. How much risk do you think they would take if they didn't have the central bank's printing press? How much more cautious would people be about where they put their money is there was no FDIC? Wouldn't they make deposits based upon what the bank was doing? Perhaps if a bank was engaged in both commercial/investment banking, people wouldn't feel safe depositing their funds with them.
People don't deposit funds at banks in the US based upon how sound the bank is, they could care less for the most part because the FDIC will pay them their money back anyway. All the banks engaging in reckless behavior have the same guarantee as those using restraint. How many banks will restrain themselves if their competitors are making all the money, too (assuming the fascist banking system in place)?
With all due respect, you have totally missed the point. If banks wanted to leverage up, that's fine, let them go bankrupt. Stop guaranteeing deposits, stop "too big to fail", "systemic risk", central banking, and let those who engage in risky behavior go bankrupt. Let people deposit funds based upon soundness and potential return as opposed to who has the coolest looking ATM card. When their depositors' money isn't guaranteed and there is no government central bank to bail them out, I'd love to see how much leverage the banks use and how much risk they take. My bet is that it wouldn't be very much.
Best regards,
Chris
This entire business about deregulation is missing the point. When credit is made out of thin air, banks must reach deeper into the mudsills to get borrowers, so requirements have to be eased and, in the general state of euphoria that abounds, people will do stupid things with money.
Could 'intelligent' regulation have prevented this? I doubt it. That money is going to leak into the economy, one way or another. But let's say, for the sake of argument, that 'smart' regulation might have stopped the problem. You still have to remember what you're talking about. You are asking the institution - the government - that inflated in the first place - and presumably inflated for a reason - to close off the valves and stop that inflation before it gets into the economy. In other words, you are chastising the fox for not throwing away the key to the henhouse. If he had done so, perhaps the hens would still be with us, but we need to talk about shooting the fox.
Suppose there were tight regulations on, say, requirements for getting a loan. How can the government determine what these should be? If it creates credit out of thin air, how does it know what loan requirements should be to make sure the 'right' number of people get loans now? How does it now determine this 'right' number? And with stricter loan requirements, this extra credit is going to sit around at the banks, who must pay the Fed for it, thus weakening the banking sector.
Deregulation was not the problem, and even if tighter regulation could have kept the inflation from leaking out, you are still hurting the banking sector (plus I doubt you could have accomplished it) not to mention asking government regulators to behave in a way in which they simply are not going to behave.
" I would like someone to explain to me how rescinding the Glass-Steagall and allowing Wall Street investment banks to play fast and loose with formerly guaranteed deposits was a good thing."
What is your specific complaint? That some banks made contracts with others that turned out not-so-good for the banks? These were voluntary transactions, and did not involve you. They effect the economy only indirectly - and that's because of the business cycle/fractional reserve banking system that is propped up/exacerbated by government intervention.
So fundamentally, a voluntary transaction between two organizations - none of which is you - shouldn't concern you. The fact that is does indirectly is due to government.
Also re: Glass Steagall, banks that wouldn't have been affected by the act were hit hard, the act was originally just rent-seeking by JP Morgan (http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf).
But the more important thing to understand is that even if such a regulation could patch up the system by simply limiting transactions and limiting leverage, the important thing to ask is why are these things desirable? So that a business doesn't make bad bets? Shouldn't this only affect the business? And shouldn't the business not want to fail already? Well, not when the government has created an interconnected system full of moral hazard. Attack the moral hazard.
"How did Henry Paulson's political connection's resulting in Wall Street's leverage ceiling going from 12 to 1 to 30 to 1 add to financial stability? "
The government is the source of financial instability. I don't want this system to be propped up. It needs to die so we can get actual stability in the form of markets.
Anyone who has ever taken a course in any financial vocation knows that it is regimented down to how you wipe your ass and anyone working in the business knows that it constantly ratchets up over time (I think Hoppe or someone said it was like 10,000 pages added since 1980). The only people who talk about this "deregulation" don't know what they are talking about.
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