I know. This is a cheap way to blog. Sent the first response from a friend posted in this run to a colleague with an opposite view on things. So, here’s his response. “”… dismantling Glass-Stegall Act’s separation of types of banking functions was a really bad idea, and unless we create a new version of it, we are in for more trouble.”
I agree completely. The underlying problem is that bank deposits are currently protected by FDIC. As a result, the depositors don’t pay much attention to what the banks do with the money, giving the bankers a free hand to gamble as they wish; if they win they become rich, and if they lose the government (taxpayers) bail them out. It wasn’t always that way. Jim Grant, a very smart guy with his own newsletter, recounts the story of a bank in San Francisco during the 1840′s. There was no FDIC, and if the bank failed, the owners were personally on the hook for every penny of debt. As a consequence, the bank in question carried a 25% capital cushion (currently we think 8% is OK).
When property prices shot up during the gold rush in 1849, the bank took out an ad in the paper stating that property was in a bubble due to the gold rush, and they would no longer write ANY mortgages for new purchases based on the current valuations. Imagine that happening today! But back to the present.
We need to not allow banks to gamble with taxpayers money, which is what Glass-Stegall was about, and which we need to return to. Hasn’t happened yet.
1. 1% share of GDP is grotesquely large. So what? It’s the natural result of a richer world, in which everyone on average has more money. Are there still problems with fairness for the other 99%? Yes, but generating instant billionaires like the founder of Facebook is a side effect, not a problem. A lot of political discussion revolves around the ‘fairness’ of some people making more than others, but the real issue is C. If we continue to grow world wealth eventually we can C. If someone becomes a trillionaire in the process, so be it. Read the rest of this entry »