In 1999, Senator Dorgan (Democrat -North Dakota) predicted that because Congress repealed a certain law, within a decade we will see massive taxpayer bailouts. See story here. According to the readers of the Motley Fool, a website dedicated to investing, repeal of this law is the single greatest cause of the financial collapse of 2008. Which law was repealed in 1999 that is being blamed for the financial meltdown? The Glass- Steagall Act.
The Glass-Steagall Act was passed in 1933 as a result of the Great Depression. It prohibited commercial banks, like the ones that average people use to store their money, from engaging in the investment business, like derivatives. See here. The banks didn't like those restrictions and over a period of about 20 years, the banking industry was able to weaken and finally repeal the Act. See timeline here.
There has been discussions recently about what new laws need to be in place to prevent another financial meltdown. For example. on the PBS news show Newshour, the experts discussed what new regulations need to happen. See here. While I disagree with what they say about limiting executive pay, I do agree that we need to re-impose the wall between commercial and investment banking. The reason for this is that while there are greater returns in investment banking, there are also greater risks. And it seems to be in human nature to be greedy and put the savings of others (commercial bank accounts) in risky investments.
From the savings and loan crisis to the Great Depression to Mr. Law creating the first stock bubble, a wholly unregulated financial system seems to lead to individuals acting on their greedy impulses to the extent that they bring the whole system down. Unrestrained greed brought the financial system down in the 1930s and unrestrained greed did the same in 2008. As Senator Dorgan said in 1999, that which is true in 1930 is true in 2010. We need to either re-enact Glass-Steagall or eliminate greed from all bankers and investors. Enacting the law is the obvious choice.
On a final note, here is a NPR marketplace article on whether banks have learned or changed anything from the financial crisis. Interesting article to listen to.
The Glass-Steagall Act was passed in 1933 as a result of the Great Depression. It prohibited commercial banks, like the ones that average people use to store their money, from engaging in the investment business, like derivatives. See here. The banks didn't like those restrictions and over a period of about 20 years, the banking industry was able to weaken and finally repeal the Act. See timeline here.
There has been discussions recently about what new laws need to be in place to prevent another financial meltdown. For example. on the PBS news show Newshour, the experts discussed what new regulations need to happen. See here. While I disagree with what they say about limiting executive pay, I do agree that we need to re-impose the wall between commercial and investment banking. The reason for this is that while there are greater returns in investment banking, there are also greater risks. And it seems to be in human nature to be greedy and put the savings of others (commercial bank accounts) in risky investments.
From the savings and loan crisis to the Great Depression to Mr. Law creating the first stock bubble, a wholly unregulated financial system seems to lead to individuals acting on their greedy impulses to the extent that they bring the whole system down. Unrestrained greed brought the financial system down in the 1930s and unrestrained greed did the same in 2008. As Senator Dorgan said in 1999, that which is true in 1930 is true in 2010. We need to either re-enact Glass-Steagall or eliminate greed from all bankers and investors. Enacting the law is the obvious choice.
On a final note, here is a NPR marketplace article on whether banks have learned or changed anything from the financial crisis. Interesting article to listen to.
March 18, 2010- I need to take back what I said in this blog. I wrote Senator Bennett's office and asked them about the Glass-Steagal Act. They indicated that even if the act had been in effect, it would not have prevented the financial meltdown because 1) Investment banks such as Bear Stearns were not covered in the Act and 2)the toxic assets that hurt the commercial banks likewise were not prohibited by the Glass-Steagal Act. Both of these factors are, in my opinion, what brought us the financial crisis along with unrestrained greed. So it really wouldn't have made a difference even if the Glass-Steagall Act had been in place.
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