The horizon is not so far as we can see, but as far as we can imagine

Insanity is Doing the Same Thing and Expecting Different Results: Real Reform Means Reinstituting Glass-Steagall at Full Strength and Breaking Up Financial Conglomerates

Ok, enough already. I’m sick of people talking about modern markets as if they are something wonderful. No, they aren’t. Obama was absolutely right during the election, they completely fell down on their job, not just for the last 8 years, but for most of the last 28 —whenever Republicans were in charge, and a fair bit when Dems were in charge. Ordinary people haven’t had a raise in damn near 30 years. This is success?

I simply, completely, and utterly fail to see what is so wonderful about the process of securitization. Sure, it allows you to create more financial products. Sure, it reduces the cost of capital somewhat. But are we really better off because of securitization? Of course we aren’t. Without securitization this current market meltdown would have been a hell of a lot milder. What securitization does is take the risk and spread it from the people who might be able to understand it and control it (the people actually issuing the mortgages, for example) to a ton of people who could not possibly know the risk even if they wanted to.

Ratings agency reform is not the solution, they completely fell down on the job and even if incentives were changed they are still not in a position to know whether a mortgage from Mr. Smith is legitimate. Are they going to visit the property? Talk to Mr. Smith? Call his employer? Of course not, they can’t. The only people who can are the people who issued the original mortgage.

Nor should risk be transfered much if at all. Risk must stay with the people who issue the mortgage. If they know it’ll be off their books they won’t do proper due diligence, and no one else can do it. At most, risk should be transfered once and must be transfered in whole and understandable form, rather than taking 20 different incomes steams (or more), melding them together, chopping them into tranches and selling them to people who really have no idea what they’re buying, while you’ve booked your profit and washed your hand, so even if you sold them crap, hahahah, it’s their crap now (or so you think.) Risk must be assumed only by people who can understand it and manage it and who are exposed to the consequences of their decisions. (Ability to manage risk, but knowledge that if they don’t they will get hurt.)

Now let’s talk about this idea that the Fed should basically regulate everyone, with the SEC occasionally peeping over it’s shoulder to see whether market manipulation is ocurring. This is necessary because there are, as Obama points out, no longer clear cut differences between banks, insurance companies, investment banks, brokerages and so on. The repeal of Glass-Steagall put an end to those differences. Glass-Steagall, remember was put in place during the Great Depression to stop another Great Depression from occuring. One of the things that people who lived through the 20s believed caused the Great Depression was not having clear cut boundaries between the businesses, again so that risk was divided appropriately and so that fewer companies became “too large to fail”.

But somehow we think we know better than the people who lived through the last Great Depression; the people who lived through the 20’s and the last great market crackup. So we’ve repealed most of Glass-Steagall and allowed everyone to be in everyone else’s pockets, huge financial conglomerates to mushroom into monstrosities, and allowed unregulated “innovative” financial “products” like collateralized debt obligation (CDOs) to grow into such monstrosites that financial markets were huge multiples of the entire real world economy.

Then it all comes crashing down and people claim to be surprised.

Enough, already. Yes, the world is not exactly the same as it was in the 20’s and 30’s, but we didn’t start having these disasters till after Glass-Steagall and other Depression era securities laws started getting repealed. First set in the 80’s, followed by most of the remainder in 99.

It’s time to break up the great financial conglomerates. Force them to cut themselves up and divide back into brokerage houses, investment banks, retail banks, insurance companies and so on. Put them all under the clear control of regulaters. Reinstitute Glass-Steagall, with very mild modernization, and get rid of most complex derivatives, excessive leverage, the carry trade and so on.

Obama was right during the primaries, the philosophy of the past 28 years has been a failure. Why don’t we, why doesn’t he, treat it as so, and re-institute what worked, re-regulate, then slowly modify from there, with complete transparency and strong regulation.

Financial markets exist to serve ordinary Americans and non-financial American businesses. They haven’t been doing that properly. Time to make sure they do.

This is a repost from September 16th 2008.  Very minor changes made to indicate when Obama said it, otherwise it stands the test of time remarkably well—which should tell you that nothing has been done since then.  The greatest economic disaster since the Great Depression, and a year and half later nobody has tried to fix what caused it to happen.  Priorities, priorities…


Stirling Newberry and Ian Welsh on Blog Talk Radio


American Exceptionalism: What Works Elsewhere Won’t Work In America


  1. “Why don’t we, why doesn’t he, treat it as so, and re-institute what worked?”

    It “works” for the banksters. What’s wrong with you?

  2. Ian Welsh

    Every once in a while I like to pretend that elected officials like the President care about the wellbeing of the majority of the population.

  3. Ratings agency reform is not the solution, they completely fell down on the job and even if incentives were changed they are still not in a position to know whether a mortgage from Mr. Smith is legitimate.

    Plus, who watches the watchmen? It doesn’t seem to be the federal government these days. Not only did the ratings agencies have problems, so did the accounting firms and the financial press. It’s to the point where you can’t believe anybody.

    Not too long ago, there would have been elected officials who found that idea scary. Now it seems to be someone else’s problem in the Hitchiker’s Guide SEP field sense.

  4. Lex

    The sentence that’s been kicking around in my head for a couple of months now won’t leave me alone. Once upon a time, The Market served mainly as a means for industry to raise capital; today, industry and commerce serve mainly as means for The Market to extract capital.

    The problem seems to be that through propaganda a particular form of Capitalism has become entrenched as the only form of Capitalism. Any critique of this form is treated as an attack on Capitalism itself…even though the biggest players in the current form of American Capitalism don’t use capital to produce anything except dividends for themselves.

    I’d be accused of the dreaded Socialism for merely proposing that Capitalism should function for the benefit of the most participants possible. We’re like the late Soviet Union insomuch as our leadership is completely blinded by ideology, to even the detriment of the system itself. Rather than making system function, it concentrates on convincing the population that the system functions perfectly.

    All the king’s horses and all the king’s men are worthless if they’re standing around a pile of gooey eggshell pieces proclaiming that Humpty Dumpty is in perfect form.

  5. Not only is it not going to happen, it’s not supposed to happen.

    All of the big bank$ters are bankrolled by the government with low sometimes interest free loans. Not only that, there’s the promise of more if things get really bad again. That’s for them.

    Now, however, we hear that consumer interest rates are about to go through the roof. That’s for us.

  6. nihil obstet

    We’ve repealed Glass-Steagall, and increased risk? The financial men (mostly) who would profit enormously from the repeal captured the politicians who repealed it. I understand that the use of “we” can try to convey that the national policy has been wrong, but I’ve come to the conclusion that the use of “we” for the oligarchs is destructive propaganda. Underlining the extent to which the ruling class acts in opposition to the majority interests and wishes is a first step in the work to get back a democracy.

  7. rumor

    But there’s the rub, right? If the US cuts the legs out of vacuous financial wizardry that has been responsible for the (non-existent) piece of the economic pie which has been growing larger and larger in proportion over the last 30 years, there is not much left of the US economy. Certainly, restructuring to actually develop a productive economy is possible, but entails risk of failure itself, particularly in light of peak oil and the compete-into-the-ground global environment that exists now and didn’t in the post-war era. And of course it would take a complete change in politics, a long-term national effort, and require a lot more honesty in politics and a lot less American fantasy. The administration probably understands at least the first half of the above, hence… try to keep the dying system going, harder, faster, stronger!

    Wile E. Coyote closes his eyes and pumps his legs in the air even harder.

    I honestly don’t think we can except any other political result. It’s not fair, but that’s humanity for you.

  8. Ian Welsh

    Or, as I’ve said elsewhere, the Cap’n Jack Sparrow rule: “all that matters is what a man can do and what a man can’t do…”

    Replace man with nation. Because while it’s true that the US isn’t a functioning democracy, it is true that the levers are still there… (more on that at some point.)

  9. John B.

    Lex, that is a really perceptive post. Really spot on IMO.

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