How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis
By Shah Gilani
Contributing Editor
Money Morning/The Money Map Report
No one person is responsible for the credit crisis, the failure of investment banks, the insolvency of commercial banks world-wide, the implosion of the world’s stock markets, or for leading us to the precipice of another great depression.
The truth is there were many.
Fundamental and pragmatic banking regulations, which arose from the devastating financial collapses of the Great Depression, for decades strengthened U.S. banks and capital markets, making them the twin engines of American growth and the envy of the world.
The systematic dismantling of those same regulations by greedy bankers began in earnest in 1980, peaked in 1999, and finally climaxed with an insane Securities and Exchange Commission ruling in April 2004, a final decision that paved the way for the implosion of everything regulation was designed to protect.
Just how did we get here?
Wall Street bankers, their exorbitantly well-paid lobbying army of former congressmen and former regulators, their greatly contributed-to sitting legislators and, most egregiously, the self-righteous and still mega-rich “former” Street executives have systematically eviscerated the muscle and bones from the regulatory bodies charged with protecting us from banks’ self-destructive greed. An inordinately powerful group of executive insiders from the once-deeply respected House of Goldman Sachs (GS) have served as U.S. Treasury secretaries and in innumerable other administrative capacities.
A Reflection on Reform
The Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law by President Jimmy Carter, was the first major reform of the U.S. banking system since the Great Depression.
While touted as a boon to consumers, the law was actually a gold mine for bankers. Among other requirements and banker “gifts” the 1980 Act’s provisions:
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- Lowered the mandatory reserve requirements banks keep in non-interest bearing accounts at U.S. Federal Reserve banks.
- Established a five-member committee, the Depository Institutions Deregulation Committee, to phase out federal interest rate ceilings on deposit accounts over a six-year period.
- Increased Federal Deposit Insurance Corp. (FDIC) coverage from $40,000 to $100,000.
- Allowed depository institutions, including savings and loans and other thrift institutions, access to the Federal Reserve Discount Window for credit advances.
- And pre-empted state usury laws that limited the rates lenders could charge on residential mortgage loans.
In 1980, in a virtual landslide, Ronald Reagan was elected and grabbed the conservative mantle. A year later, the shock troops of the heralded Reagan Revolution launched their attack and embarked on a massive, systematic de-regulatory campaign. President Reagan’s first treasury secretary, former Merrill Lynch & Co. Chief Executive Officer Donald T. Regan, became chairman of the Depository Institutions Deregulation Committee.
In a burst of deregulatory bravado in 1982, Treasury Secretary Regan ushered through the Garn-St. Germain Depository Institutions Act. Key provisions of the Act ultimately coalesced with Treasury Secretary Regan’s protection of the lucrative “brokered deposits” business, in which Merrill was a major player, and paved the way for the future collapse of the savings and loan industry.
Some of the provisions in that 1982 Act would later be blamed for thousands of bank failures. The provisions permitted the following:
- Allowed savings and loans to make commercial, corporate, business or agricultural loans of up to 10% of their assets.
- Authorized a capital assistance program - the “Net Worth Certificate Program” - for dangerously undercapitalized banks, under which the Federal Savings and Loan Insurance Corp. (FSLIC) and the FDIC would purchase capital instruments called “Net Worth Certificates” from savings institutions with net worth/asset ratios of less than 3.0%, and would theoretically later redeem the certificates as these shaky banks regained financial health.
- And, most frighteningly, raised the allowable ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets.
The history of S&L greed and fraud - which resulted from brokered deposits and deregulation - wasn’t forgotten by legislators. But it was steamrolled by bankers pursuing an even greater unshackling of the regulations that constrained their ambitions.
Shattered Glass
The ultimate prize was to be the undoing of the Glass-Steagall Act of 1933. Glass-Steagall, officially known as the Banking Act of 1933, mandated the separation of banks according to the types of business they conducted. Investment banks, whose securities related activities resulted in relatively large risks, were to be separate from commercial banks, whose depositors needed greater protection. The Act created deposit insurance and the government wasn’t about to allow taxpayer-backed insurance of commercial bank deposits to be exposed to securities related risks. It was a prudent and sensible separation. Bankers tried for years to undermine and overturn Glass-Steagall, but it took time.
In 1987, Alan Greenspan replaced Paul A. Volcker - the stalwart Federal Reserve Board chairman, national inflation-fighting hero and active proponent of Glass-Steagall (and now economic confidant of President-elect Obama).
In its twilight days, the Reagan administration was determined to further fertilize the seeds of deregulation and Greenspan’s Ayn Rand-inspired “objectivist,” free-market philosophies would be the perfect embodiment of the deregulatory movement.
Securitization Enters the Scene
A year later - in 1988 - two very quiet revolutions sprouted that would ultimately hand bankers twin throttles to rain terror on us all.
That year, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (by nature of the loans’ long maturities and illiquidity) lenders should be expected to set aside substantial reserves; however, marketable securities that could theoretically be sold easily would not require significant reserves.
To obviate the need for such reserves, and to free up the money for more-productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a now-securitized form. Not inconsequentially, this would lead to a disconnect between asset-quality considerations and asset-liquidity considerations.
Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm, wife of U.S. Sen. Phil Gramm, R-Tex., as chairperson, would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation.
These actions would not be inconsequential in the aforementioned reign of terror that was still to come.
In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. Enron’s fraud and implosion became the poster child for deregulation run amok and ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues.
The constant flow of money to lobbyists and into legislators’ campaign coffers was paying off for the banking interests. The Fed, under Chairman Greenspan, was methodically deconstructing the foundation of Glass-Steagall. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers’ Solomon, Smith Barney investment bank and the Travelers insurance business.
There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound. If aggressively flouting existing laws to pursue a personal agenda isn’t a perfect example of bankers’ hubris and greed, then maybe I’ve just got it all wrong.
Phil Gramm - the fire breathing free-marketer, Texas senator, and chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs - rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions. In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (C) as the new “King of the Hill.”
From his position of power, Sen. Gramm consistently leveraged his Ph.D in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: “I look at subprime lending and I see the American Dream in action.”
If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices. From 1989 through 2002, federal records show that Sen. Gramm was the top recipient of contributions from commercial banks and among the top five recipients of campaign contributions from Wall Street. [Click here to read "How Subprime Borrowing Fueled the Credit Crisis."]
Since moving on from the Senate in 2002 to mega-universal Swiss banking giant UBS AG (UBS), where he serves as an investment banker and lobbyist, Gramm makes no apologies. “The markets have worked better than you might have thought,” he has been quoted as saying. “There is this idea afloat that if you had more regulation you would have fewer mistakes. I don’t see any evidence in our history or anybody else’s to substantiate that.”
The “New” Math
On April 28, 2004, in a fitting and perhaps flagrant final act of eviscerating prudent regulation, the SEC ruled that investment banks may essentially determine their own net capital. The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates.
The tragedy is that the SEC never used its new powers to examine the banks. The idea was that Consolidated Supervised Entities (CSEs) could use internal models to determine risk and compliance with net capital requirements. In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns and securities with no ready market into “healthy” capital assets against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1. [Click here to read "How Wall Street Manufactures Financial Services Products," an insider's look at how greed on Wall Street results in unscrupulous investment instruments]
When the meltdown came the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. (JPM), the bankruptcy of Lehman Brothers Holding (LEHMQ), the sale of Merrill Lynch to Bank of America Corp. (BAC), and the rushed acceptance of applications by Goldman and Morgan Stanley (MS) to convert to Bank Holding Companies so they could feed at the taxpayer bailout trough and feast on the Fed’s new Smörgåsbord of liquidity handouts. There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead.
The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives. The September 1993 Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in our results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies”.
No one would tempt an alcoholic by putting one in charge of a liquor store and neither would anyone put a fox in charge of a henhouse. So why are greedy bankers being allowed to rewrite banking regulations to enrich themselves while leveraging taxpayers, destroying trillions of dollars of hard-earned savings and sinking us into a potential depression?
Until transparency sheds light on the backroom dealers and influence peddlers that aligned with Wall Street against Main Street, we will continue to be held hostage to the same greed and avarice that manifests itself in too many human beings who actually have the power to execute their personal agendas.
This is the story of how we got here. Where we are is actually even scarier than authorities are willing to admit. In the second article in this three-part series later this week, I will be the unfortunate bearer of the news of where “here” actually is.
[Editor's Note: Money Morning Contributing Editor Shah Gilani, a retired hedge-fund manager and noted expert on the global financial crisis, will host a post-Inauguration "Web summit" that talks about the pending regime change in Washington and what it means for investors in the coming months.
The Jan. 22 session - entitled "The Regime Change in Washington Triggers War on Wall Street" - is free of charge to investors who register in advance. It will start at 7 p.m. EST.
Those who tune in can expect to get candid insights not available on your favorite cable-TV finance show or in the business section of your local newspaper.
"Wall Street doubletalk got us into this crisis; I hear more excuses than straight talk. Most of the dialogue is noise," said Gilani, the editor of the "Trigger Event Strategist" and a commentator who is known for his deep connections inside the investment-banking world of Wall Street. "The truth may be difficult to swallow, but without hearing it, there's not much hope for finding the right way out of the maze."
Gilani will show investors how to interpret recent moves by lawmakers and their cronies to unlock the credit markets, and what's really behind the recent machinations taking place in the power alleys of Wall Street and in the halls of government down on Capitol Hill. With this insight, investors will be able to proactively strengthen their investing portfolios in the face of an escalating credit crisis and deteriorating financial markets - whose ripple effects are only now manifesting themselves in Europe, India and other markets abroad. Investors should sign up early; those who do will be able to also submit questions in advance for Gilani's consideration. Click here for more information, including instructions on how to sign up for the free web summit.]
News and Related Story Links:
- Whitehouse.gov:
Jimmy Carter. - Whitehouse.gov:
Ronald Reagan. - Wikipedia:
Donald T. Regan. - Wikipedia:
Garn-St. Germain Depository Institutions Act. - Investordictionary.com:
Brokered Deposits. - Investopedia.com:
Glass-Steagall Act of 1933. - Wikipedia:
Ayn Rand. - Wikipedia:
Basel Accord. - Wikipedia:
Phil Gramm. - FDIC.gov:
Bank Holding Company Act of 1956. - Wikipedia:
Sarbanes-Oxley. - Wikipedia:
Gramm-Leach-Bliley Financial Services Modernization Act - Wikipedia:
Bank Holding Cos. - Money Morning Special Investment Research Report:
International Investing: Why U.S. Investors are “Boxed Out” of Big Global Profits. - Money Morning News Analysis:
Bank of America, Wells Fargo and PNC End 2008 by Closing Major Buyout Deals.
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Comment by Wohid on 13 January 2009:
Dear Mr. Gilani,
Thanks for your brilliant and eye-opener article that should alert the US Administration & Policymakers especially in choosing right persons in right positions and right laws for right indsutry. I enjoy your highly informative articles. Regards. Wohid
Comment by Phil Steinschneider on 13 January 2009:
One could argue that all the regulation in the world automatically requires additional regulation to mitigate the effects of previous regulation. Before long, there is so much regulation that markets become paralyzed.
In other words, a completely free market self-corrects much more quickly and sweeps away the debris efficiently; while incrementally increasing regulation simply moves the day of reckoning further and further out, making the eventual correction gargantuan.
The only check on the free market is failure. By trying to regulate away failure, we only postpone and consequently worsen the day of reckoning.
An analysis of the various causes of the current collapse is certainly compelling and interesting, but it does not reflect the idea that for each rule heaped upon bankers, another preceding rule was the cause behind the need for the subsequent one.
The pursuit of ever-greater profit motivated by greed fed by the availability of easy money will always trump wise and prudent practices. And no matter what regulation is foisted upon the bankers, a system that attempts to soften the landing of economic corrections will inevitably lead to much greater problems in the future.
The choices are relatively simple: 1) unregulated free markets with high sort term returns and nasty little corrections, 2) a nationalized system with steady low returns, or 3) a hybrid of the previous two that will always lead to high long term returns and huge corrective depressions. Which one have we chosen?
Comment by Chris on 13 January 2009:
Excellent article. I guess the old adage “If it ain’t broken don’t try and fix it” is appropriate here. The sheer incompetency of the SEC under Cox’s leadership is mind-boggling. The uptick rule had been in place for decades and had successfully balanced the competing interests of buyers and sellers. No problem. We’ll just junk it. Glass-Steagall worked for almost 8 decades at keeping bankers from confllicts of interests and predatory practices. No problem. We don’t need it.
The bankers and hedge funds have turned the stock markets into a Vegas-style casino where it’s just not “chic” to hold onto a stock longer than a day or two. The so-called experts bragging about how all that cash on the sidelines will fule the next bull market are sadly mistaken. These greedy whores at Goldman and JP Morgan hav ensured that an entire generation of investors will avoid the markets like the plague.
Comment by Greg Keeports on 13 January 2009:
The article is very interesting and full of facts. However, it seems to ignore the role that Fannie Mae and Freddie Mac had in bringing forward this financial crisis as well as the incompetence shown by the bond rating services. Also, Mr Graham was not the only person in Congress or administrations who sought to deregulate (Robert Rubin to name one) who worked to remove rules and then move into the private sector, promoting high risk ventures. Seems this could be a bit more balanced since all of this resulted from a true bipartisan effort.
Comment by Kim Beyeler on 13 January 2009:
What we need is honest money instead of debt money as decribed in “The Truth in Money Book by Theodore R. Thoren and Richard F. Warner in 1980.
Comment by Arthur Grimes on 13 January 2009:
While Mr. Gilani has written a rather insightful article about banking, he leaves out one of the more crucial aspects of this financial meltdown, and one which the conservatives are still arguing will save this economy–the free market. Mr. Steinschneider can argue that regulations paralyze the markets. That can, indeed, happen. However, that is not the case here. Video tapes of Rep Barney Frank, Chris Dodd, and Maxine Waters, all show that it was the lack of regulatory enforcement of Fannie Mae, Freddie Mac, and lending institutions in general, with liabilities in the trillions from hedge funds, that help lead to their financial woes. Frank and Dodd both argued that those two institutions were all in very good shape, with nothing to worry about with them.
What is one crucial aspect of this meltdown that is being tossed aside so easily? It is a free market run amok, being abused, that is right now fueling this meltdown.. That is further illustrated by the huge black hole the initial outlay of bailout funds have found.. International news reports are now telling a grim story of how hundreds of trillions lent to financial institutions to motivate them to lend, has all disappeared, with not one penny used to lend. Why is that? Why is it Secretary Paulson came to the Congress with a 3 page proposal telling Congrees that he would have no accountability to anyone, with George Bush’s blessing..
In theory, a completely free market self-corrects much more quickly and sweeps away the debris efficiently. Our free market is now being, and has been, abused to the point of a quickly spiraling downward of this economy. Incrementally increasing regulation does not necessarily move the day of reckoning further away.. Incrementally increasing regulation has often been the sad, but necessary result of abuse of the free market. OSHA regulations demanding work places with safety procedures are one such example. Besides, why is it considered necessary to “clean away the debris” ? What debris? Are the car manufacturers now considered debris? Are 9 of the largest banks now to be considered debris? Is it the underlying tenet of a civilized society that whatever cannot survive will be allowed to fail? I can watch whales devouring entire schools of fish on Nature. Must we all act like animals?
As for the issue of “failure” being the only check on the free market. That mentality implies that not only should regulation have no part whatsoever in the market. Even better, the entire economic system should be treated with the Dawinian philosophy. Everything must simply learn to survive, or fail.
An analysis of the various causes of the current collapse is certainly compelling and interesting, but it does not reflect the idea that for each rule heaped upon bankers, another preceding rule was the cause behind the need for the subsequent one.
As for the choices. In listening to those with warnings of dire consequences of nationalizing our financial system, one would think that any attempt to regulate markets does in fact lead to a nationlized system with steady low returns. In fact, pundits are predicting financial ruin for this country with nationalization. History, shows, however, that nations such as Russia did not nationalize banking simply to eliminate the free market and force dependence on the government. Frequently, financial systems have been nationalized to restore stability in the wake of excessive, long term abuse of the free market. Stalin, himself, said in 1931, that economically, Russia was 50 years behind the advanced countries. Why would he say that? Because Russia was losing ground to capitalist countries, and with a weak military, open for all out invasion.
I submit that handing out funds like candy to the free market has already shown what the free market thinks of consumers. Meanwhile, a mushrooming unemployment rate, unprecedented foreclosure rate, among other factors, is now contributing to a quickly increasing downward spiral of this economy.
I do wish, in a way, that the free market would correct that. However, if it does so, it will likely do so with a very nasty correction that has this entire country in a severe depression. Is this the price we are willing to pay for the sake of a free market?
Comment by Carlos E. Comesana on 13 January 2009:
It was hard to me to digest in a single swallow this article because it clearly shows how greed without limits (regulations?) deconstructed in such a way political and professional leaders curricula that at the end quasi destroy the country. How can anyone after the last of the series of financial market debacles oppose to healthiest regulations? The sentence of this article which I like the best is my favorite since the appointments of President elected Mr. Obama on the Treasury area, “How is it possible to put the fox to take care of the hen house”. Guess Mr. Obama reconsiders as soon as possible his contradictory appointments.
Comment by Loan Ranger on 13 January 2009:
Interesting observations.
However, there is no mention of the other elected officials who were supposed to be overseeing Fan and Fred. That is especially frightening considering Sen Dodd and Rep Frank are going to oversee whatever changes happen in bank regulation.
Of course the real problem is the American voters who elected so many of the people (or their appointees) responsible for this mess. Until the voters refuse to elect or re-elect these subtly corrupt candidates, the situation will not improve.
These American voters are the same people who borrowed and borrowed and borrowed. The US economic problem is a creation of the American people and not just a few prominent officials.
Comment by Bob Kennicott on 13 January 2009:
Great article, but, I see no mention of government coersion of banks to make sub-prime loans. No mention of government outlawing “red-lining”. No mention of the Political Correctness that the banks were facing if they made logical loans. They were not interested in making “bad” loans, and refused to make them until the Feds said, “OK, OK, you just make the loans, and we will guarantee that you won’t lose money on these loans.” THAT opened the floodgates, but it is not mentioned in Gilani’s well-documented treatise. There is no mention of the involvement of Chris Dodd and Barney Frank, either. This article only looks at the “Banker’s Greed” side of the equation, and stops there.
Comment by armando salinas on 13 January 2009:
Great article on what not to do,I believe that it points out our system main flow which the lobbying monster,it hinders all areas of government and may be our achilles heal,as it effects every area from health care to banking.Thanks Armando
Comment by Mannstein on 13 January 2009:
If nothing else regulation at least minimizes the swindlers in the market.
Had there been some regulation and oversight investors would have have been spared the Bernie Madoff swindle. But then these same investors might yet be be bailed out on the backs of the tax payer who is just trying to keep his head above water.
As a taxpayer I wonder if I’ll ever see a bailout?
Comment by Robert O. Birdwell on 13 January 2009:
Viruses kill more people than stampeding elephants for a reason.
One thing the author missed was the “virus” that made all other things possible.
Prior to 1995, people who were swindled in securities transaction were empowered to act as “private attorneys general” and sue and collect treble damages under Title 18 U.S.C. Section 1964(c), the civil section of the criminal RICO statutes.
The S.E.C. hated the law; the U.S. Attorneys hated the law, and the banks and securities houses hated the law.
In 1995, congress inserted a little “exception” (world changing virus) into 18 U.S.C. 1964(c).
“1964(c) Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee, except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962. The exception contained in the preceding sentence does not apply to an action against any person that is criminally convicted in connection with the fraud, in which case the statute of limitations shall start to run on the date on which the conviction becomes final.”
That “exception” required that the United States S.E.C., and DOJ, first had to “convict” the swindler. The betrayal was carried out simply by the S.E.C. and DOJ refusing to investigate and prosecute the swindlers, with the rare exception that some “small fry” were prosecuted for show.
It is no “accident” that, after 1995, banks became “investment banks” and virtually every financial transaction, i.e. mortgages, car loans, credit card debt, was bundled and morphed into a “securities instrument” and sold to “investors” who could no longer sue them under 1964(c) while the S.E.C. and DOJ turned a blind eye and a deaf ear to the howling by defrauded investors.
Everyone involved in this scam is a criminal. This begs the question, “Why are the very people who looted the economy and created this ‘civilization-destroying’ depression the ones who are receiving the trillions of dollars in “bailout” money from the U.S. Treasury?”
ANSWER: Because, in a lawless society run by criminals, they can and will, until stopped!
Comment by James MacInnis on 13 January 2009:
Dear Mr. Gilani:
I enjoy your columns very much, not onlu because of your indepth knowlege but mostly because of your candor and honesty. In studying your evaluations of the global economy there is one thing that resonates with me and it is the fact that this is not only an American problem, it is, in fact, an international one. The greatest evidence of this is the balance of payments deficits in America and surpluses in other countries. Surpus nations are fearful of losing America as the consumer of their products because it effects their economies adversely. If America continues to burdon itself with greater debt it will ultimately undermine the integrity of the $U.S. but also their national security and autonomy as a soverign nation.
Since trade is realisticly supposed to be conducted in goods and services, the IMF or the World Bank could demand that within a certain time frame, where surplus trade dollars are not spent, they be taken out of circulation in order to restore equilibrium to world markets. I also believe the autonomy of soverign nations is undermined and threatened when balance of payments surplus dollars are used to buy real estate in Manhatten or U.S. treasury bills. I suggest Sir that, rather then Breton woods continuing under a Washington consensus, it be restructured into a truly international institution with the power to write off balance of payments.
What is your opinion on this?
James MacInnis
Welland, Ontario
Canada
Comment by Mark Baumann on 14 January 2009:
De-regulation has nothing to do with the U.S. financial crisis.
The CRISIS is simply the ‘predicted’ outcome of a central bank (the fed) controlling a fractional reserve system.
It is without doubt the greatest Ponzi scheme of all time.
Basically the private bankers create money from nothing, loan it out, and collect interest in perpetuity, (power granted to them by the Federal Reserve Act of 1913).
Don’t be a fool and believe that the Federal Reserve is actually Federal or that it has any Reserves!
The crisis will continue in divergent up and down cycles until we reach the point of hyper-inflation and a total disintegration of the dollar. This has happened to other countries in the past, it is doomed to happen to the U.S.
Of course this could all be stopped by right now by replacing the federal reserve notes (dollars) with with real money (money that is backed by gold). Followed up with the U.S. Congress repealing the Federal Reserve act of 1913.
Most people are not even aware that the Federal Reserve is privately owned!
These owners collect most of the interest off the U.S. national debt, which is currently $1 billion dollars a day!
The interest is paid to the Rockafeller’s, the Morgan’s, the Bank of Spain, the Bank of Israel, the Rothchild’s, the Kennedy’s, the Getty’s, etc…. It’s no wonder they stay wealthy for generations!)
Get active! Learn and understand the real problem:
–> The Federal Reserve &
–> Fractional Reserve Banking.
Comment by Donald Craig on 14 January 2009:
Mr. Steinschneider, you spewed ….
>The only check on the free market is failure.
Not when the government has to bail out these entities time after time to avoid ruining the lives of countless citizens (who played zero part in this disaster - retirement funds) or to prevent the country from falling into a recession which would affect an even greater percentage of the population!
Add to this what Bush and Co have done during the last 8 years … eviscerated even more regulations or put cronies in charge to ensure that things went their way in as many fields (MSPB, FLRA, FAA, OSC, etc., etc.) as they could get their grubby hands on.
Bush and Co. cannot leave fast enough!
Comment by Mike Pincher on 14 January 2009:
The bottomline for regulation advocacy is that without it, innocent borrowers lose homes. I say innocent for two reasons: (1) Many are unsophisticated in lending. Negative amortization is just an occult term to them and (2) The lenders have the ultimate control by their own parameters as to what is a statistically safe loan or not. It is like standard contract law–onerous (unconscionable) terms are held against the dominant party that drafted them.
Too often I see in analyses the impact on the capitalist sector lender and not on the borrower. In plain English, self-correction is applied to the screwer but not the screwee. Well without the screwee, money and capitalism would have nothing to operate on to start with.
The key to analysis is the impact on the public generally, grass roots and all. Any other analysis is elitist and manipulative and has no place in a just society. That is the bottom line, end of story. If that is not the main focus, to preserve the public good for the majority without unConstitutionally victimizing the minority, then the very government itself must be overthrown and replaced by a just one. The founding fathers all understood this, and so did Jackson and Lincoln. What is a just one?: One that regulates for the protection of the public for one of the very basics in life: a shelter one can call his own. Every human being has the right to live in a comfortable setting–not necessarily luxurious, but comfortable.
Comment by Searcher on 14 January 2009:
“Every human being has the right to live in a comfortable setting–not necessarily luxurious, but comfortable.”
Nonesense.
Comment by Ernest Seinfeld on 15 January 2009:
Mr. Gilanis analysis is excellent and some of the above comments make good contributions. As described by him, there are more than one contributory factors
and people involved, too many to be analyzed in detail and ranked.
Therefore, we must search for the root causes. No regulation, regardless of ho
good and effective, can help if the regulators don’t want, don’t know or don’t care to enforce them, and even worse, actively undermine them.
This will not change unless basic conflicts of interest are eliminated. The main conflict, of course, is MONEY. As long as our legislators can be bribed under the euphemism “campaign contribution”, as long as these legislators can leave or loose their positions and turn around to become conduits for these contributions and other goodies, the situation is hopeless. Secondly, people who are affected or who are likely to be affected (Regan, Rubin, Paulson), should be required to eparate themselves from the regulated institutions for a long time. Finally, there should be a wall between private business that perform quasi-official functions, like the rating organizations (Moody etc.).
It is very difficult to believe that the experienced and well-trained experts at these rating organizations did not get at least a whiff of what was in the inside of the subprime-securities they rated tripple-A.
Pingback by Citigroup Splits Up After Fifth Straight Quarterly Loss on 17 January 2009:
[...] As Shah Gilani reported on the disastrous consequences of banking deregulation in Money Morning last Tuesday, Congress passed the Gramm-Leach-Bliley bill in 1999, "at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup as the new ̵…‘" [...]
Comment by john d.smith on 18 January 2009:
The business of regulation, what and how, needs specifying. Regulation can, and has, been horribly counterproductive because it focused on interest rates, business expansion, employment goals, etc. Lowering interest rates while bubbles formed, overly stimulating the economy while credit levels were excessive, etc. was damaging, not corrective.
George Cooper, in his book “The Origin of Financial Crises” made a very strong case for the Fed and Central Banks to use credit levels as the controlling variable, not price levels.
Pingback by Jutia Group - Market Jitters & Political Critters on 19 January 2009:
[...] As Shah Gilani reported on the disastrous consequences of banking deregulation in Money Morning last Tuesday, Congress passed the Gramm-Leach-Bliley bill in 1999, "at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup as the new &lsqu…‘" [...]
Pingback by An Open Letter to President-Elect Barack Obama: How a Regulatory Makeover Can Fix the Financial Crisis on 19 January 2009:
[...] Money Morning Deregulation Series (Part I of III): How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis. [...]
Pingback by As New U.S. President Barack Obama Takes Office, He Faces Some of the Toughest Financial Challenges in U.S. History on 20 January 2009:
[...] that perverse management incentives in the financial sector, unsound new financial tools and sloppy regulation also played important [...]
Pingback by Jutia Group - Market Jitters & Political Critters on 20 January 2009:
[...] that perverse management incentives in the financial sector, unsound new financial tools and sloppy regulation also played important [...]
Pingback by How Wall Street's Compensation-Defined Culture Fueled its Demise on 9 February 2009:
[...] Money Morning Deregulation Series: How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis. [...]
Pingback by Plan to Repair U.S. Banking System Unveiled by Former Hedge Fund Manager on 25 February 2009:
[...] the world, to the brink of depression is important. But even more important is the realization that the regulations that could have prevented this have been systematically dismantled, such that none of the regulatory bodies charged with safeguarding the public, the capital markets [...]
Pingback by Money Morning Affiliates » Blog Archive on 27 February 2009:
[...] the world, to the brink of depression is important. But even more important is the realization that the regulations that could have prevented this have been systematically dismantled, such that none of the regulatory bodies charged with safeguarding the public, the capital markets [...]
Pingback by How Beatniks, Pyromaniacs and Gangsters Caused the Global Financial Crisis on 18 March 2009:
[...] Money Morning: How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis [...]