SO, WHAT'S GLASS-STEAGALL ALL ABOUT?

Senators Elizabeth Warren (D-MA) and John McCain (R-AZ) have introduced legislation to bring back the Glass-Steagall Act, which would be a big first step in reigning in the excesses of the financial sector. Below is the story behind the legislation that they're trying to revive ...

It was 1929. The stock market collapsed, in part because many commercial banks were trying to do what investment banks did. The problem was that - unlike investment banks who find people with lots of money to burn (i.e. the rich) to make their investments - the commercial banks were bundling up the deposits of their regular customers to make big market bets before 1929.

But wait, it gets better (or is that worse?).

In addition to commercial banks sending customer deposits to investment banks (via "broker loans") insurance companies that found themselves under the same financial roof as an investment bank saw their funds drained and shifted to investment banks. With a steady flow of easy money, as it were, from commercial banks and insurance companies investment banks had a field day. They took big risks and made larger and larger bets. Indeed, the number of trades doubled between early 1928 and the latter part of 1929 (4 million to 8.2 million), as did the Dow-Jones industrial average (191 to 381).

As long as the market kept going up the investment bankers saw handsome returns - which they famously did not share with the customers whose accounts backstopped their market bets.

Then, in 1929, everything went south. The stock market crashed on the nonsense that had floated it for years. Panic hit and many bank depositors lost everything. Almost 5,000 banks would shut their doors.

To prevent this from happening again the U.S. Congress came up with a plan. The Glass-Steagall Act (also known as the Banking Act) was passed in 1933. Apart from creating government backed depositor insurance (FDIC) it also outlawed commercial banks from doing what investment banks do and prohibited commercial banks, insurance companies, and investment banks from operating under the same roof. 

There would be no more serendipitous movements of money from one institution to another.

To be sure, Glass-Steagall didn't prevent Wall Street from gambling with its clients' money (see here and here). But it did protect the little guy on Main Street from Wall Street, and Wall Street wannabes, who used their accounts to backstop their market bets.

The best part of these developments was that "market collapse" and "government bailout" were effectively erased from America's economic language for the better part of 50 years.  

In spite of the fact that Glass-Steagall and other regulations had stabilized our economy and protected the little guy on Main Street the financial sector got restless.

Prodded by political developments in the 1980s deregulation became the norm. After sufficiently diluting Glass-Steagall with pin prick legislation throughout the 1980s and 1990s the financial industry decided that they needed to neuter Glass-Steagall once and for all. They got the U.S. Congress to effectively repeal Glass-Steagall with the Financial Services Modernization Act (also known as the Gramm-Leach-Bliley Act). President Clinton signed it into law in 1999.

MSNBC's Dylan Ratigan explains what happened ...

Visit NBCNews.com for breaking news, world news, and news about the economy

And just like that, after 50-plus years of relative economic stability, the small bailouts that emerged with reckless deregulation in the 1980s and 1990s turned into the monster 2008 market collapse. Incredibly, there was one U.S. Senator, Byron Dorgan (D-ND), who saw it coming in 1999 ...

There's little doubt that Senators Warren and McCain's legislation will not be enough to reign in the stupidity that we see in the marketplace today (it has little chance of passing). But it would help banks focus on boring loans for small businesses, homes, and infrastructure projects rather than pursuing risky investments in derivatives, collateralized debt obligations, and credit default swaps. 

There's much more to do, which includes walking back some of the reckless borrowing and deregulation that was passed in the 1980s and 1990s.

But the Warren-McCain legislation is a start.

- Mark

IN THE FYI CATEGORY: Fair's fair. Here's the American Enterprise Institute's "Five Myths About Glass-Steagall." It focuses on trying to shift blame for the 2008 market collapse to the government (who else?), but is not particularly convincing, or well argued. Here's why ...

#1 is misleading (at best) because it emphasizes underwriting rather than pooled resources and shared obligations ... # 2 says nothing about the bogus collateral behind the traded assets ... # 3 really says that trading toxic crap is not the problem, it's getting stuck with the toxic asset that is ... #4 is more opinion (and a wrong one at that) than fact ... #5 misses the point (ignores?) the role of our shadow banking system and how deregulation allowed anyone who could fog a mirror to get a loan.

For a better understanding of the market collapse click here, here, and here.


P.S. Kudos to those who wrote and asked me to write about Glass-Steagall. When I get more than a couple of requests I make an extra effort to respond ;-)

THE INSANITY CONTINUES

I've posted on the insanity before. Incredibly, the insanity continues. The picture below captures the Republicans Obamacare vote obssession that's led to the 38th vote to repeal the Affordable Care Act ...

If you want to take a look at the GOPs penchant for repeating the same failed storyline when it comes to tax cuts, budgets, repeated math failures, and failed analysis click here, here, and here.

In the FYI category, while all of this has been going on our Republican-led House of Representatives hasn't passed a single comprehensive jobs bill program. If you want to take a look at the 30 bogus jobs bills the GOP claims to have passed (they really focus on taxes and deregulation) click here.

- Mark

READING FOR THE WEEK (July 16, 2013)

House Republicans pass a pork-laden farm bill that gives billions to the agriculture industry ... with no money for food stamps (WP Wonkblog).

Is President Nixon's former Vice-President, Spiro Agnew, the starting point for the talk radio mentality we see today (History Commons)?

If the Director of National Intelligence - David Clapper - can lie to Congress with no repercussion he can lie about anything else, including Syria and Iran (Truthout).

The Roberts Court is out of control ... It appears that developers can now claim an unconstitutional "taking" of their property rights if cities and counties don't allow them do what they want, or require them to follow their land use guidelines (SCOTUS blog).


NATIONAL SECURITY / SNOWDEN STUFF
The making of the U.S. surveillance state, 1898-2020 (Truthout).

Latest Snowden poll; 55% say whistle blower, 34% say traitor (Zero Hedge).

Greenwald: Snowden docs show NSA "blueprint" (Chron).

Did the U.S. get the Europeans to ground the plane flown by Bolivia's President Evo Morales? (Buzz Flash).


ECONOMICS
What do you know ... there's an oil glut, and North America is leading the way (Calgary Herald).

Explaining Basel III and where the Fed's embrace falls short (NY Times/DealB%k).

Giant banks have taken over the real economy, as well as the financial system, which allows them to manipulate markets on a massive scale (Zero Hedge).

What's the "chained CPI"? (AARP)

Could 9/11 related insurance claim(s) be insurance fraud (PressTV)?


MISCELLANEOUS
Fed up teachers refuse to teach summer school in Texas (Takepart).

Giants vs. A's, in the Silicon Valley sweepstakes (WSJ).

Vanity Fair does an interesting review of John F. Kennedy's last days with Jackie after the death of their son Patrick (Vanity Fair).

Michelle Obama issues a smack down to a heckler who was just being rude (Cafemom). 

The colossal stupidity of calling Hilary Clinton too old (and why the GOP doesn't get it, still) (Bloomberg).

- Mark 

THE REPUBLICAN PARTY AND RACE

Did the Republican Party embrace racists and bigots to win national elections in the latter half of the 20th century? Yes they did, and it was part of a larger "southern strategy" that President Nixon used to gain the White House in 1968.

While I have written about this in the past (a discussion on political parties) Allen Clifton's article "The Truth About Republican Racism and the 'Southern Strategy'" provides a nice overview of the point when the GOPs southern strategy developed. Because of copyrights issues, I'm only posting one-half of the article here.

Whenever the topic of racism gets brought up between Democrats and Republicans, there are two facts you’ll almost always hear conservatives use to counter the belief that their party is full of racism:

• President Abraham Lincoln was a Republican
• The KKK was largely organized, and populated by, Democrats

And both are facts.

But when someone uses these two items as their defense that the Republican party isn’t loaded with racism, they’re only showing their ignorance about the reality of racism within their party.

It’s true, Southern Democrats were extremely racist.  At the same time, Northern “liberal” Democrats and Republicans had already been working together to end discrimination and pushed for ending segregation.

See, in 1948, President Harry Truman made one of the boldest public moves by a Democrat towards Civil Rights for African Americans by creating the President’s Committee on Civil Rights, and ending discrimination in the military.  At the Democratic National Convention in 1948 a call was made for civil rights—prompting at least 35 Southern delegates to walk out.

These movements towards civil rights for African Americans spurred a short-lived political party — the States Rights Democratic Party, also known as the “Dixiecrats.”  The people who comprised this movement adamantly defended segregation of the races.  It was an attempt to keep the “tyrannical Northern liberals” from “destroying the freedom of states’ rights in the South.”

Luckily, this political party only lasted one election.  But what this movement really did was recognize the shift of Democrats embracing equality for African Americans and Southern whites strongly opposing any mention of civil rights.

The moves by President Truman sparked the spread of equality in the South and left Southern white Democrats with a feeling that their party was abandoning their racist — and oppressive — system of beliefs.

Over the next decade, more and more Democrats began to embrace equality, passing the Civil Rights Act of 1964 and the Voting Rights Act of 1965.  And while more African Americans began to vote for Democrats, in the late-1960′s a new Republican strategy was put into place—the “Southern strategy.”

This was a plan was that was first popularized by Richard Nixon.

What the “Southern strategy” essentially does is it identified the fact that African Americans were voting for Democrats, therefore Republicans decided they would make white voters more aware of this fact in hopes of driving the “white vote” towards the Republican party ...

The problem with the southern strategy today, as Senator Lindsey Graham (R-NC) pointed out in 2012, is that the Republican Party is not "generating enough angry white guys to stay in business for a long time."

You can read the rest of Clifton's article here.

- Mark 

BANKS GET THE GOLD MINE, STUDENTS GET THE SHAFT

What's wrong with this picture?

To help Wall Street and the banks survive after they set fire to our financial system in 2008 the Federal Reserve and the federal government effectively handed over $4 trillion to help stabilize the economy. After receiving $3 trillion from the Federal Reserve, and over a trillion dollars from the U.S. taxpayer, the financial sector is now hoarding about 85% of what they were given (actually, lent or traded).

Oh, and the banks get to borrow money from the Federal Reserve at .75%.

College graduates paying student loans cumulatively owe about $1.2 trillion. After the market collapse many find themselves in serious financial trouble. Those who find themselves in financial trouble are told to stand on their own two feet, and to pay back their loans (which cannot be discharged in bankruptcy hearings, or absorbed by the government under assorted "toxic asset" programs available to Wall Street). Making matters worse, after the 2008 market collapse student loan debt is the only category of consumer debt that has increased since the market collapse.

Oh, and our GOP-led Congress just allowed interest rates on student loan debt to increase from 3.4% to 6.8%.

The rationale behind all of this is that our GOP-led Congress wants the income derived from the interest payments that students pay ($51 billion in 2013) to continue. You know, so we can pay down our multi-trillion dollar national debt that the stupidity of the banks helped make worse.

So, yeah, after the market collapse of 2008 the banks got the gold mine, while our nation's college students got the shaft.

- Mark

FAITH vs. REALITY

Too funny ...

- Mark 

QUESTION

I have a question. 

If a cable company in New York can ask the Supreme Court to intervene and ask the National Labor Relations Board to stop pursuing labor disputes because they dispute the constitutionality of President Obama's recess appointments to the NLRB (caused by the GOP's appointment obstructionism) ...

... can labor unions ask the Supreme Court to intervene and ask the Federal Reserve to stop bailing out and funneling cheap money to Wall Street and our Too Big To Fail banks? You know, until the constitutionality of the Federal Reserves authority to create $3 trillion (by purchasing toxic assets) is settled.

- Mark 

NOTE: In reality my question is a bogus one. There's no constitutional dispute on either issue here. The President can make recess appointments and Congress can delegate financial authority. I'm just raising questions about Justice Robert's decision to accept the cable company's petition, which is being pushed by corporations who benefit from GOP obstructionism and government paralysis.

WEEKLY READING ... on Corruption and Crime (7-9-13)

Around the world a majority of people feel corruption and bribery have gotten worse, and think governments can't fix it (CBS News).

HERE'S HOW IT'S HAPPENING ...

Scamming our seniors ... How seniors get bilked out of $2.9 billion per year (AARP).

Scamming investors (and an update on this post) ... How private equity-investment firms may be scamming you by outsourcing the management of your account (Fortune).

Scamming the poor ... The battle over payroll cards versus payroll deposits & checks (NY Times/DealB%k).

Scamming the middle class with rising fees (NY Times).

Scamming the state ... £13 trillion (or about $21 trillion) hidden from the taxman by the global elite (The Guardian).

Scamming the state, II ... The GAO finds that U.S. companies only pay 1/3 of the corporate tax rate (Truthout).

Scamming the state, III ... Global trade reduces tax revenue (Washington Post / Princeton University).

Scamming students ... with rising tuition and fewer state subsidies, then charging students more interest than the Federal Reserve is charging banks for interest on the loans (CBS / Mark Martinez).

Scamming labor ... by using the government to go after labor rights and unions (NY Times).

Scamming the Federal Reserve, the middle-class, and the state ... rather than loaning money out the banks are sitting on 81.5% of the trillions Bernanke's Federal Reserve gave them (Ritholtz Blog).

Scamming the old fashion way ... bribery, lying, cheating (Think Progress).

The result ... Inequality and concentrated wealth. £6.3 trillion in assets are owned globally by 92,000 people, or about 0.001% of the world's population (The Guardian).

Here's how growing inequality is happening, in less than 3 minutes ...

- Mark 

MY C-SPAN INTEVIEW ... THE MYTH OF THE FREE MARKET

As part of a larger profile on Bakersfield and authors from the region I did an interview last month with C-SPAN for their American History series. Since the interview is also part of C-SPAN's BookTV series my discussion covers the major themes from my book "The Myth of the Free Market." Enjoy ...

The C-SPAN interview appeared this 4th of July weekend, and can be found here.

- Mark 

WHY WE NEED LABOR UNIONS

I don't need to add anything here ...

- Mark