This past week we were informed that JPMorganChase lost $2 billion in what they admit was stupid and excessively risky credit default swap trades.
The Great Depression had many causes. Some inevitable as the economy has cycles, excessive exuberance (Stock Market Crash), a wide spread drought, and some caused by unwise government policies (notably the Smoot-Hawley Tariff). And it was made worse because of the bank failures and loss of depositors money.
Two great responses which served our nation well for almost 70 years and intricately related was:
1) Federal Deposit Insurance which assured depositors their money was safe.
2) Glass Steagall which, if the government was going to insure deposits, restricted banks from engaging in certain risky activities which would add risk to the financial system (called systemic risk).
Around 1984, Glass-Steagall was reformed to allow banks to sell insurance to their customers and establish wealth management services (primarily provide stock broker services). I worked for Senator Abdnor at the time and this was an area under my purview. Primarily because of Senator Abdnor’s chairmanship of the Joint Economic Committee plus South Dakota’s reliance on community banks, Senator Abdnor was a leader in the crafting of this G-S reform.
To this day, I do not doubt the reform was a good reform in light of changing technology and increased competition for bank deposits from non-bank entities. But after it passed, my colleague from Senator D’Amato’s office (also a leader because he represented New York) and I had a celebratory drink when it passed. During my tenure with Senator Abdnor it was easily the most significant and complex matter on which I worked.
As we celebrated, we saw something on the horizon we feared, a further relaxation of G-S and possibly its demise. In the late 1990’s with the support of President Clinton, Treasury Secretary Robert Rubin, and the Republican Congress, our fears were realized with the passage of Gramm-Leach which gutted G-S.
Gramm-Leach had two effects. First, it allowed the banks to engage in the activity that resulted in the $2Billion loss by JPMorgan. Second, it gave big banks access to low cost capital (from federally insured deposits and access to the Federal Reserve) to expand and essentially become the predominant influence on financial activity. Such size by definition increased systemic risk to our financial system.
When the meltdown happened in 2008, I was not surprised. Then, Congress and the President responded with a stubborn refusal to examine Gramm-Leach and made it worse by passing Dodd-Frank, a “cure” that only worsened the disease (large banks that are “too big to fail” were only going to get bigger).
Rather than make this post longer than necessary, I leave you from some articles that address the following:
Describes how they have gotten bigger. When Gramm-Leach passed, the biggest banks controlled about 20% of the nation’s deposits. In 2007, they controlled 43% of the nation’s deposits. Today, proving what I predicted from Dodd-Frank, they control an astonishing 56% of the nation’s deposits.
A Call to Revive Glass-Steagall:
And, related to reviving Glass-Steagall and pointing out that pretending the government can regulate us into total protection is futile.
Abolish Dodd-Frank and revive Glass-Steagall. Until we do it, the next meltdown is just around the corner. And, this time we will not have the resources we did in 2008 ($3Trillion of Federal Reserve cheap capital and $1Trillion of direct federal bailouts). The system WILL collapse making the Great Depression look like a walk in the park.
P.S. Sorry, I can’t figure out how to imbed the links so you have to cut and past them.