Could the recession have been prevented if the Glass Steagal Act was not removed?
How do you counter socialists who say Glass Steagall is necessary? I find it hard since Glass Steagall does not have any bad effects even if it is unnecessary. So is the argument against Glass Steagall is purely on principle and not utilitarian.
What countries have completely unregulated finance? So I can compare them with US and say these countries survive without Glass Steagall
What are the different types of financial regulation and what do they do?
an oildie but goodie, written when parts of the act were about to be repealed, explaining it all:
http://mises.org/freemarket_detail.aspx?control=216
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It's easy to refute an argument if you first misrepresent it. William Keizer
Please elaborate on the article. I do not understand how exactly it answers the questions posted above. I also do not understand the phrase 'monetizing government debt to use as an asset to pyramid more credit'.
The article says that glass steagal originally had two pieces to it. First that bank deposits are insured by the gov. Second that banks can't use depositors money on wild investment schemes.
There are four ways to combine these two parts of the act
1. no deposit insurance, banks can do what they want with depositors money. In other words, the law isn't passed at all.
This is ideal. Banks have total freedom to make money as they wish, but if they lose it, they and their customers are screwed. This is very healthy, for it lets the banks make good profits if they are wise, but puts fear of loss in them if they are foolhardy. Also, customers keep a sharp eye on the banks, ready to pull out their money at a moment's notice if they smell something fishy. Thus the banks will guard their reputation and investments to make sure they keep their customers.
2. there is deposit insurance, and banks can do as they wish with the money. This is the situation the article bemoans, and what we have now.
Since the depositors are insured by the govt, that means if the bank just tosses the money right into the ocean the taxpayer will reimburse the customers. In other words the banks have no reason to be cautious whatsoever. And with the repeal of the second half of the original glass steagal act, they are allowed to do just that, invest in all kinds of risky gambles.
3. No deposit insurance, banks cannot invest as they please. Just the opposite of the current situation.
Here the banks have the fear of God [customers leaving forever if bank fouls up] in them, and so are needlessly hindered by some unneeded regulatiuons. This kind of useless regulation is usually done to help big banks keep little guys out of the banking biz.
4. deposit insurance, banks are regulated. This was the original act.
It is bad that banks can be risky and irresponsible and the taxpayer will pay the bills, and so it is good that they are at least partially limited in what things they can invest in. maybe that way they wont do the really irresponsible stuff, like they did recently when the second part of the law was repealed.
As for the jargon,the original phrase in the article is saying the same thing twice. The banks are allowed to '"monetize" gov't debt', meaning they are allowed "to use it as an asset to pyramid more credit." OK to break it down to normal han speech:
"monetize"=pretend it is actual money
monetizing gov t debt= the banking laws allow fractional reserve banking. this means for every paper dollar a bank has in its vaults, it is allowed to write out a check for TEN dollars and give the check to someone as a loan. He has to pay interest on the ten dollars. The hope is that he will deposit the check right back in the bank and so the bank will never have to actually produce the missing nine bucks it doesn't have. Incredibly, this has worked most of the time.
Now if the bank in the past lent the paper dollar to the US govt, then they have zero paper money in their vault. So they are not allowed to lend anyone else ten dollars anymore. But if the banks are allowed to "monetize" the govts debt, it means they are allowed to pretend that the govt owing them a dollar is the same as if they have an actual dollar in their vault, and can now write a ten dollar check and lend it to someone.
pyramid= what the law allows banks to do, i.e. to build an imaginary upside down pyramid of money. At the bottom of the pyramid is the actual money they have. On top of that is the nine extra dollars they are allowed to pretend they have and loan to someone.
monetizing government debt [by which he means]:
to use as an asset= pretending the money the govt owes the bank is money the bank actually has
to pyramid more credit= to lend more money they dont have.
Kenneth:Could the recession have been prevented if the Glass Steagal Act was not removed?
According to AE [as I understand it] the recession is caused by the govt printing money and giving it away at low interest rates. When all that money is flying around loose, it is bound to be spent on foolish disasters. Once it was tulips, another time worthless stocks , another time houses no one needs or can afford. When it sinks in that the money has been wasted, a recession happens.
If glass steagal was not removed, AE argues that the money would have found some other avenue to be frittered away.
Thank you so much I'm finally starting to understand. But can you elaborate on the ways the money would be frittered away had the Glass Steagall not been repealed? This is so interesting to me!
Kenneth: Thank you so much I'm finally starting to understand. But can you elaborate on the ways the money would be frittered away had the Glass Steagall not been repealed? This is so interesting to me!
Hopefully more knowledgable posters will help me out here, but as I understand it, part 2 of the Glass Steagal Act said that a bank that gets deposits from the man on the street is not allowed to be an investment bank, meaning to use the money it got from Mr average person and invest it. It could only make loans to people and businesses. They could not buy stocks and they could not buy derivatives.
Now in the old days, when the USA was a powerhouse economy, banks knew how to lend money. They made sure they lent it to someone who had good collateral, and a good job. If it was a home loan, the guy borrowing made a hefty down payment of 20%, so that if the house went into disrepair, or if he walked away from the loan, he also was going to lose a nice piece of change.
That all changed, as we know, making loans a risky proposition.
But even riskier is buying stocks. There is no collateral, no one with a good job making payments, no 20% down payment, nothing. The bank could very well wake up one morning and find out the stock they bought is worth pennies on the dollar.
But worst of all is certain types of derivatives. If the bank buys stock, at the very least they actually own a piece of the company. If tyhere is competent and honest management of the comapny they bought stocks of, the odds are pretty good thoings will turn out OK.
But some derivatives are literally gambles exactly like in Vegas. Should event X happen [say the price of something or other goes up or down], I make a bundle. If it doesn't happen I lose everything. I don't get ownership of anything, just as I don't own the dice I roll in Vegas.
That's what I meant by fritter away the money. When the second half of Glass steagal was repealed, but the first half kept intact, the banks would lose nothing no matter what they did with the money, because it was insured [first half]. And they were allowed to buy derivatives with the money they got from depositors [second half repealed], the riskiest way of all to play with money.
Reimposing Glass Steagall would drastically reduce the stability of banks since it would essentially ban bank diversification. The real solution is an end to fractional reserve banking and government intervention in currency markets.
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Just to make sure I wanna ask if DEPOSIT INSURANCE byt FDIC = monetizing government debt to pyramid more credit?
Smiling Dave: Kenneth:Could the recession have been prevented if the Glass Steagal Act was not removed? According to AE [as I understand it] the recession is caused by the govt printing money and giving it away at low interest rates. When all that money is flying around loose, it is bound to be spent on foolish disasters. Once it was tulips, another time worthless stocks , another time houses no one needs or can afford. When it sinks in that the money has been wasted, a recession happens. If glass steagal was not removed, AE argues that the money would have found some other avenue to be frittered away.
OOPS!
Yoiu asked me I meant by "fritter away" in the above quote
I answered your q about this the wrong way. In an earlier post I explained what "fritter away" if Glass Steagal WAS repealed.
Now I see you were asking what I meant by "fritter away" if it WAS NOT repealed, and deposit banks could not make investments.
The answer is "who knows?" When the gov prints tons of new money, there is no telling on what foolishness it will be spent. At one time in France it was on worthless land in the swamps of Louisiana. At another time in Holland it was tulips. In the 20s it was stocks, in the 90's it was dot.com stocks. Lately it was home loans to people who can't possibly repay.
But there is one common theme: The buyers don't actually need what they buy, or think it is really useful, but plan to sell it off to the next sucker. It works well for a while [the boom], till we run out of suckers [the bust].
As for your latest post, does "DEPOSIT INSURANCE byt FDIC = monetizing government debt to pyramid more credit". No it doesn't. Deposit insurance by FDIC was passed in 1933. The article by Lew Rockwell is talking about a law in the 90's.
DEPOSIT INSURANCE byt FDIC = the gov promises to help the individual little guy who put his money in the bank. If the bank loses his money, the govwill give it ot him. Of course this is much more of a help to the bank. It means if they make foolish decisions and lose the depositors money, they have nothing to fear. So from now on they don't have to think twice before using the little guy's money.
monetizing government debt to pyramid more credit= something I explained at length in a previous post.
Ok... Now I'm confused about how the Federal Reserve is part of all of this. If Deposit Insurance by the FDIC(after Glass Steagall was partly removed) allows banks to make very bad decisions with other peoples' money, then wouldn't that be the main reason for why we have a depression? But many Austrians point out the Fed as the primary culprit in all of this. Why is this so? Wouldn't a bubble have been created with just deposit insurance whose effect is similar to a bailout(and no Federal Reserve)? I can't see the connection between the Federal Reserve and deposit insurance.
My knowledge about the economic meltdown is very limited. All I knew was that the Fed lowered the interest rates which induced a lot of borrowing and created a bubble in the housing market. I didn't know about the Deposit Insurace part until now.
Kenneth: Ok... Now I'm confused about how the Federal Reserve is part of all of this. If Deposit Insurance by the FDIC(after Glass Steagall was partly removed) allows banks to make very bad decisions with other peoples' money, then wouldn't that be the main reason for why we have a depression? But many Austrians point out the Fed as the primary culprit in all of this. Why is this so? Wouldn't a bubble have been created with just deposit insurance whose effect is similar to a bailout(and no Federal Reserve)? I can't see the connection between the Federal Reserve and deposit insurance. My knowledge about the economic meltdown is very limited. All I knew was that the Fed lowered the interest rates which induced a lot of borrowing and created a bubble in the housing market. I didn't know about the Deposit Insurace part until now.
Yes, it's time you got your feet wet and did a bit of reading. Step one is the classic Economics in One Lesson, by henry Hazlitt, available free on the internet, and possibly right on this site.
Now for your q. If there was only Glass Stegal, the banks would have indeed wasted the depositors money and been insured by the taxpayers. So that they destroy theor depositors' wealth and get it back from the taxpayer. Fine. And so one bank has ripped the taxpayer off.
BUT how likely is it that every bank makes the same mistake at the same time? For some odd reason, bank failures seem to come in bunches. Why is this?
Also, when they all seem to go down, like now, how come there isn't a tremendous tax hike to pay for all this? Take the last 700 billion dollar bailout. Rest assured that if there was 700 billion bucks lying around unused, it would have been spent long ago by politicians. That is what they live for, after all, to take your money as fast as possible. So where did the 700 billion come from. It's not petty cash by any means.
Finally, notice that when the recession hit, it wasn't just deposit banks that went bust. It was Goldman Sachs, Lehman Bros, Bear Sterns. These guys don't have depositors and aren't covered by the FDIC.
The answer to all this, including your q, is the Fed. They always print huge amounts of paper money and hand it out to their friends BEFORE any recession. It's all that free money that leads to foolish investments. Depositors alone are not enough to create such a tidal wave of free cash in the economy.
Q: But if printing money creates recessions, won't the stimulus package just create another horrible recession right on top of this one?
A: Go to the head of the class.
I've actually read that book.:) It's a wonderful book but unfortunately it doesn't discuss about banking and money so much.
I would just like to confirm further. Deposit insurance transfers the risk of bad bank decisions to taxpayers while the Fed allows the banks to monetize government debt and pyramid more credit. And that creates the bubble that bursts.
Kenneth:Glass Steagall does not have any bad effects
lol
Can't stop a panic!
The act helps to cartelize banking. If the deposits are insured who cares what the bank invests in? Government insurance is shoddy. If a financial institution is poor than it should fail. Of course what you do with your property should not be held others responsibility. If a person makes a bad investment, such as a deposit in an illiquid bank, should everyone else(taxpayers) have to pay for his/her mistake?
Individualism Rocks
Kenneth: I've actually read that book.:) It's a wonderful book but unfortunately it doesn't discuss about banking and money so much.
Glad to hear you read it. Next step is the short info packed book What has Govt Done to Our Money, by Rothbard. Available here for free.
Kenneth:Deposit insurance transfers the risk of bad bank decisions to taxpayers
yes
Kenneth:while the Fed allows the banks to monetize government debt and pyramid more credit.
No. This was a small detail that happened at the time Lew wrote his article. I don't even know if it's still so.
Kenneth:And that creates the bubble that bursts.
As I understand it, the bubble is always created by new paper [or computerized] money coming into existence.
Rothbard's book should make things very clear.