Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How the Demise of Glass-Steagall Helped Spawn the Credit Crisis

Politics / Market Regulation Feb 17, 2010 - 08:38 AM GMT

By: Money_Morning

Politics

By Shah Gilani

Question: Please address why the removal of the Glass-Steagall Act in 1999 caused the financial meltdown of 2007 and why its reinstatement is the only way to stop the financially risky behavior allowed after it's removal. Address why we will very likely have another meltdown (probably in 2010) unless reinstated.


Answer: Mr. Scott: While the overturning of what remained of Glass-Steagall did not cause the meltdown, it certainly contributed mightily to the systemic nature of the crisis.

Allowing commercial banks and investment banks to marry created giant operations that became too big to fail and too profitable to break up. Everyone was making money. The overriding problem was not the integration of commercial (deposit-taking and loan-making) banks with investment (capital-markets trading) banks, but the extraordinary migration of all banks into the same products, trading, and risk-taking businesses. I am definitely including the ubiquitous game of mortgage origination, securitization, sales and trading.

While it would seem prudent to separate taxpayer-backstopped commercial banks from investment-banking operations that take more risk, it's not likely to happen.

Too many interested parties have too much money to arm lobbyists to maintain Wall Street's status quo.

The so-called "Volcker Plan" to ban "proprietary trading" at institutions that take depositor funds and that are ultimately backstopped both by the Federal Deposit Insurance Corp. (FDIC) and taxpayers is a sensible plan. It has been reviled on the grounds that it is unworkable because it is impossible to define "prop" trading.

But that's just a ruse. The real reason the plan is hated is because it represents a back-door resurrection of Glass-Steagall. In order to stop prop trading at deposit-taking banks, we'd first have to separate deposit-taking banks from investment banks with trading and broker-dealer operations.

Too bad the plan has already been flattened by a frontal assault from U.S. senators Christopher J. Dodd, D-CT., and Richard Shelby, R-Ala., U.S. Rep. Barney Frank, D-Mass., and the rest of the Wall Street shills.

But the Volcker plan makes sense. The truth about proprietary trading is that it needs to be defined narrowly. If a deposit-taking institution holds risky securities or products that it intends to profit from, that's a form of trading - there's a risk involved. Not that there aren't risks involved in a bank making loans that don't get repaid. That is also a bank risk - but at least that's a risk that can be better-managed, accounted for, and provisioned for.

Banks shouldn't take inordinate risks for profit and derive executive compensation from risky trades made with taxpayer protection. That's a recipe for moral hazard on a massive scale.

If we're going to prevent another meltdown, the first thing we have to do is make sure systemic integration doesn't create another supra-trade like we saw with the subprime trade that wrecked so many banks and households.

We need to break up big banks so that they can never again endanger the functioning of capital markets or the economy. We also need to create a logarithmic capital-ratio-scaling regime to ensure that as risk increases, capital is more than plentiful to absorb losses.

[Editor's Note: Retired hedge-fund manager R. Shah Gilani has established a reputation as one of the leading experts on the global credit crisis. His savvy analyses have appeared in Money Morning and have been read by millions across the Internet. In a special report that appeared last week, Money Morning Contributing Editor Shah Gilani detailed the need to ban risky trading by banks. To check out that report, please click here.]

Source :http://moneymorning.com/2010/02/17/credit-crisis-7/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in