• Arguments against the Glass–Steagall Act of 1933 and the FDIC?
    17 replies, posted
I'm arguing with a hardcore liberal socialist who blames free-market capitalism for the current economic crisis (and apparently the Great Depression). We've been arguing about this for a while now, well about 30 minutes ago he mentioned a bill that FDR passed called the "Glass–Steagall Act," which he hails as "the reason there were no busts in the 1940s, 1950s, and 1960s," which is a faulty argument in it's own right, given how last month I called him out on his claim about his so-called "1950s prosperity due to high taxes." Sorry for getting a bit off-topic there, but I am ashamed to say that I haven't done much (any) research on the Glass–Steagall Act or the FDIC and I'm currently suffering from sleep deprivation, so please, would someone be so kind as to outline the key points of the "Glass-Steagall Act" for me? I'm currently doing my own research on the subject, but in the meantime, could someone please point me in the right direction here? Much appreciated! :dance: For reference, this is a small portion of the essay he sent me, I've already countered and disproved the rest of his essay, but I do not know enough about the "Glass Steagall Act" to argue against it at this time. [quote]Instead, doesn’t it sound much more likely that a lack of banking regulation caused this recession AND the great depression, considering the fact that banks are what lead to the economic collapses? Uncontrolled Wall Street trading caused the great depression because the financial institutions were unregulated, and millions lost their investments in banks because we had no FDIC to insure those investments. After the great depression, we passed a law called Glass-Steagall that regulated banks. Under it, we had no major recessions. We won WWII, beat the soviets, built the interstate highway system, put a man on the moon, and had the highest median-income growth in the history of the world. So, after accomplishing all of this, what did we decide to do? We repealed Glass-Steagall. Banks merged and grew to be “too big to fail”, gambled heavily and it took less than a decade for banks to destroy our economy again. So go ahead and blame a law that operated perfectly fine for 25+ years. The reason the housing market collapsed was because of the way the banks bundled and traded sub-prime mortgages, not the fact that the loans were made to begin with. But nice try.[/quote] [highlight](User was banned for this post ("No concrete debate presented--admits not having done any research." - Megafan))[/highlight]
What you have to realize is that the provisions in the banking act of 1933 that are referred to as the glass-steagall act were meant to prevent investment banks from becoming involved with commercial banks. Investment banking is gambling. When these provisions began to be misinterpreted and eventually outright ignored, it was realized that glass-steagall regulation needed to be repealed in favor of new, much stricter regulation. However, instead of the stricter regulation we needed, we got even more lax, and then exactly 10 years later, the world economy collapses. It's not a coincidence. The reason they focused so heavily on the relationship between investment banking and commercial banking was because speculative investment banking is what caused the great depression.
[quote]Uncontrolled Wall Street trading caused the great depression because the financial institutions were unregulated, and millions lost their investments in banks because we had no FDIC to insure those investments.[/quote] Half truth. The stock market bubble of the 20's was fueled by the expansion of the money supply by the Federal Reserve, and they reacted too late when they realized what they were doing. They further exacerbated the problem by constricting the money supply too tightly. It's the cheap money that was poured into the economy by the central bank that was the source of the problem. That money had to go somewhere, and the stock market was very appealing. Loads of people were buying stocks on margin, share prices were on the rise (which attracted more people who wanted to get rich and further fueled the bubble). People assumed the party that was fueled by the federal reserve's monetary policy would go on forever, but as we all know, it didn't work out that way. Blaming "deregulation" for the Depression rather than the actual cause (the central bank) is sort of like blaming gravity for someone falling out a 12th story window to their death, and ignoring the person who shoved them out the window. [quote]After the great depression, we passed a law called Glass-Steagall that regulated banks. Under it, we had no major recessions.[/quote] Glass-Steagall wasn't passed after the depression, it was passed very early in the depression. We had a recession in 1937, so he's wrong on that too.. (GS was enacted in 1933) [url]http://en.wikipedia.org/wiki/Recession_of_1937%E2%80%931938[/url] And another one [url]http://en.wikipedia.org/wiki/Recession_of_1949[/url] And another one [url]http://en.wikipedia.org/wiki/Recession_of_1953[/url] And another one [url]http://en.wikipedia.org/wiki/Recession_of_1958[/url] And another one [url]http://en.wikipedia.org/wiki/Recession_of_1960%E2%80%9361[/url] And another one [url]http://en.wikipedia.org/wiki/Recession_of_1969%E2%80%9370[/url] And another one [url]http://en.wikipedia.org/wiki/1973%E2%80%9375_recession[/url] And another one [url]http://en.wikipedia.org/wiki/Early_1980s_recession_in_the_United_States[/url] And another one [url]http://en.wikipedia.org/wiki/Early_1990s_recession_in_the_United_States[/url] [quote]So, after accomplishing all of this, what did we decide to do? We repealed Glass-Steagall. Banks merged and grew to be “too big to fail”, gambled heavily and it took less than a decade for banks to destroy our economy again. So go ahead and blame a law that operated perfectly fine for 25+ years.[/quote] [quote][I]f GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass–Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified. Moreover, GLB didn't deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.[/quote] -Phil Gramm, co-sponsor of the Gramm–Leach–Bliley Act, the repeal act that he is referring to. [url]http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act#Defense[/url] [quote]The reason the housing market collapsed was because of the way the banks bundled and traded sub-prime mortgages, not the fact that the loans were made to begin with. But nice try.[/quote] The reason the housing market collapsed was because the Federal Reserve under Alan Greenspan had interest rates artificially low, investments poured into the growing housing market and they created an unsustainable bubble, like what happened in the 90s with the dot com bubble. Greenspan didn't bring the interest rates back up to where they should have been fast enough-he raised them way too slowly. When the party finally ended and home prices started to come down to where they belonged, people were stuck with mortgages that were much higher than the value of the house. Naturally a huge amount of those people just said "fuck this" and defaulted on their mortgage. The skyrocketing foreclosure rates in 2007 caused many lenders to go bankrupt and.. we all know how this story ended.
I blame the government propping up failing companies, causing them to think that they can do stupid shit because when they go under, the government will bail them out [editline]10th August 2012[/editline] Well, it's not the only reason, but a major factor
[QUOTE=download;37162461]I blame the government propping up failing companies, causing them to think that they can do stupid shit because when they go under, the government will bail them out [editline]10th August 2012[/editline] Well, it's not the only reason, but a major factor[/QUOTE] Yes, precisely. They essentially ran a scam, which was financed with tax dollars.
[QUOTE=Noble;37162438]Half truth. The stock market bubble of the 20's was fueled by the expansion of the money supply by the Federal Reserve, and they reacted too late when they realized what they were doing.[/QUOTE] No it wasn't, it was caused by rapid increases of productivity in many fields in which far too many goods were produced whilst far too people had the actual income to purchase them. Have this continue on long enough and you are going to get problems. The system then was too unstable. Central banking is very often a wise thing for any modern nation to have as it regulates the money supply and interest rates, often the private banks too. Blaming a central bank for an economic depression is silly, very often they are the very things which help to prevent economic depressions.
[QUOTE=Sobotnik;37162660]No it wasn't, it was caused by rapid increases of productivity in many fields in which far too many goods were produced whilst far too people had the actual income to purchase them. Have this continue on long enough and you are going to get problems. The system then was too unstable. Central banking is very often a wise thing for any modern nation to have as it regulates the money supply and interest rates, often the private banks too. Blaming a central bank for an economic depression is silly, very often they are the very things which help to prevent economic depressions.[/QUOTE] I disagree profoundly. I would argue that it absolutely, entirely was the Federal Reserve's fault. It's not a silly claim, it's been the subject of numerous studies by world renowned economists. It is a claim that Ben Bernanke himself admitted. [quote]Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.[/quote] [url]http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm[/url] I agree that the system was too unstable, and my argument is that the cause of that was the Fed's inflationary policies of the early 20's, which caused investments to start pouring into the stock market. Stock values were rising, encouraging more people to get in, and people were buying their stocks on margin with completely absurd leverage rates. They expected endless growth and prosperity to continue. The growth was of course completely artificial (much like the dot-com bubble and the housing bubble), and eventually it collapsed.
[QUOTE=Noble;37163241]I disagree profoundly. I would argue that it absolutely, entirely was the Federal Reserve's fault. It's not a silly claim, it's been the subject of numerous studies by world renowned economists. It is a claim that Ben Bernanke himself admitted. [url]http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm[/url] I agree that the system was too unstable, and my argument is that the cause of that was the Fed's inflationary policies of the early 20's, which caused investments to start pouring into the stock market. Stock values were rising, encouraging more people to get in, and people were buying their stocks on margin with completely absurd leverage rates. They expected endless growth and prosperity to continue. The growth was of course completely artificial (much like the dot-com bubble and the housing bubble), and eventually it collapsed.[/QUOTE] This is the exact reason I feel that we should legislate against this kind of speculative gambling. A certain level of investment is absolutely crucial to keep the economy running, I'm well aware of that, but the problems start occurring when retail and commercial banks are allowed to gamble on intangible things like futures and mortgage-backed securities, or any securities for that matter. Securities are the same kind of "it doesn't actually exist, it's not actually a real thing that we're trading, but I promise you it's worth this, and it'll only appreciate in value" thing that you'll find in any form of gambling; they're poker chips, except some poor family has to live in one. Individuals should certainly be allowed to gamble like this, I have no problem with that. If it's your own money, you can throw it into a risk/reward system, that doesn't have anything to do with me. But a bank only exists through its customers. A bank doesn't gamble with its own money. That's the big problem here, that's why so many people are facing foreclosure or paying off a mortgage that's several times more than what their home was ever worth; speculative gambling created a rush which then grows a bubble that eventually pops, just like you said. It's just like a lottery. The participants all pay into it, but only one person gets the pay-out, that's the gamble, and at the end of the day, when the bubble bursts, the lottery ends and the count goes back to zero, everyone but the winner is simply shit outta luck, and it's disgusting when huge entities do things like this in the pursuit of profits and not in the best interests of their clients.
[QUOTE=J Paul;37163358]This is the exact reason I feel that we should legislate against this kind of speculative gambling. A certain level of investment is absolutely crucial to keep the economy running, I'm well aware of that, but the problems start occurring when retail and commercial banks are allowed to gamble on intangible things like futures and mortgage-backed securities, or any securities for that matter. Securities are the same kind of "it doesn't actually exist, it's not actually a real thing that we're trading, but I promise you it's worth this, and it'll only appreciate in value" thing that you'll find in any form of gambling; they're poker chips, except some poor family has to live in one. Individuals should certainly be allowed to gamble like this, I have no problem with that. If it's your own money, you can throw it into a risk/reward system, that doesn't have anything to do with me. But a bank only exists through its customers. A bank doesn't gamble with its own money. That's the big problem here, that's why so many people are facing foreclosure or paying off a mortgage that's several times more than what their home was ever worth; speculative gambling created a rush which then grows a bubble that eventually pops, just like you said. It's just like a lottery. The participants all pay into it, but only one person gets the pay-out, that's the gamble, and at the end of the day, when the bubble bursts, the lottery ends and the count goes back to zero, everyone but the winner is simply shit outta luck, and it's disgusting when huge entities do things like this in the pursuit of profits and not in the best interests of their clients.[/QUOTE] but it is the bank's money. That's why they are able to make loans with it, and invest it in securities. If they couldn't, you would actually have to pay to use a bank, unlike the current system where they pay you (only 0.01% interest, but it's still paying). When you deposit money in a bank, it becomes the banks money. You are paying it for a service. Don't want banks to invest your deposits? don't buy their service.
For a "for dummies" approach to this topic, I recommend everybody watch Inside Job. It covers everything from the Glass-Steagall Act to the psychological profiles of high-tier investment bankers. Great film, and gives the viewer a decent understanding of a topic that's said to be too complex for a layman.
[QUOTE=J Paul;37163358]This is the exact reason I feel that we should legislate against this kind of speculative gambling. A certain level of investment is absolutely crucial to keep the economy running, I'm well aware of that, but the problems start occurring when retail and commercial banks are allowed to gamble on intangible things like futures and mortgage-backed securities, or any securities for that matter. Securities are the same kind of "it doesn't actually exist, it's not actually a real thing that we're trading, but I promise you it's worth this, and it'll only appreciate in value" thing that you'll find in any form of gambling; they're poker chips, except some poor family has to live in one. Individuals should certainly be allowed to gamble like this, I have no problem with that. If it's your own money, you can throw it into a risk/reward system, that doesn't have anything to do with me. But a bank only exists through its customers. A bank doesn't gamble with its own money. That's the big problem here, that's why so many people are facing foreclosure or paying off a mortgage that's several times more than what their home was ever worth; speculative gambling created a rush which then grows a bubble that eventually pops, just like you said. It's just like a lottery. The participants all pay into it, but only one person gets the pay-out, that's the gamble, and at the end of the day, when the bubble bursts, the lottery ends and the count goes back to zero, everyone but the winner is simply shit outta luck, and it's disgusting when huge entities do things like this in the pursuit of profits and not in the best interests of their clients.[/QUOTE] Speculation and gambling are totally different things though. In gambling, the risks are [b]artificial[/b], they are invented on the spot. In speculation, the risks already exist, and someone has to bear those risks. Here's a better explanation of why speculation is actually [i]needed[/i]: [quote]Who is a greater speculator than the farmer? He must speculate on the fertility of the acreage he rents or buys; on the amount and distribution of rainfall over the coming crop season; on the amount of pests and blight; on the final size of his crop; on the best day to sow and the best day to harvest and his ability to get help on those days. And finally he must speculate on what the price of his crop is going to be when he markets it (or at what day or price to sell for future delivery). And even in deciding how much acreage to plant to wheat or corn or peanuts, he must guess what other farmers are going to plant, and how much they are going to harvest. It is one speculation after another. And he and every entrepreneur in every line must act in relation to some guess regarding the actions of other entrepreneurs. In gambling one man wins $1,000 and another loses it, depending on whether a ball falls into an odd or even number on a roulette wheel or on which horse comes in first on a race track. But the wheel could be spun and the race could be run without the betting, without either losses or gains. The world would probably be richer rather than poorer if gambling casinos and race tracks did not exist at all. But it is not so with the great organized exchanges, either for commodities or for securities. If these did not exist, the farmer who raises wheat would have to speculate on the future price of wheat. But as they do exist, the farmer or miller who does not wish to assume this risk can ''hedge," so passing the risk on to a professional speculator. Similarly, a corporation manager who knows how to make air conditioners, but does not wish personally to assume all the financial risks involved from the vicissitudes of competition and of changing market conditions for air conditioners, may offer stock on the market and let investors and professional speculators assume those financial risks. Thus each job is done by a specialist in that job, and is therefore likely to be better done than if either the producer or the speculator tried to do both jobs. - [i]Henry Hazlitt, Failure of the New Economics p. 181-182[/i][/quote] Banks obviously want to put their funds into investments and securities so that they can make money. When you deposit your money with the bank, the physical money is theirs to spend (employees, investments, operational costs etc). They just give you an IOU in exchange. It's an over-simplification of it, yeah, but it should hopefully suffice to make my point. I have no problem with banks making investments, it's just the nature of the investments I have a problem with. Moral hazard is created when banks are knowingly allowed to make risky investments backed by taxpayer dollars. This shouldn't be allowed, but I have a different view on how it is to be regulated: Ideally, the market would regulate banks on its own. Customers would research what banks they keep their deposits with. A bank may offer great returns but come with a much higher risk of losing some or all of your deposits, which some people who aren't afraid of the risk and just want the higher returns may prefer. More conservative people could keep their money at a bank that doesn't do a lot of risky investment and offers lower returns. It should really be up to the consumer what banks they want to use. Again, the problem comes when banks buy up bullshit investments, something they'd never do in a free market with their own funds at risk, knowing they'll be bailed out by taxpayers if they fail. That's a moral hazard unlike any other. Let the market and consumer choice regulate the banks, and let there be no bailouts or FDIC. The FDIC creates a moral hazard, allowing banks to invest recklessly and run no risk of losing their deposits (because they're covered by taxpayers). The customers usually don't know or care about this, they feel safe regardless of the bank's reckless investment decisions. Without the FDIC, people would start paying attention to what banks are doing with deposits and wouldn't want to put their money with banks who make reckless investment decisions, and could lose some or even all of the deposits (meaning the customer's IOU is worthless when they come to redeem it and they're SOL). Banks would necessarily have to invest more conservatively under these conditions, because creditors won't buy bonds from a bank that isn't attracting customers.
[QUOTE=Noble;37168149] It should really be up to the consumer what banks they want to use. Again, the problem comes when banks buy up bullshit investments, something they'd never do in a free market with their own funds at risk, knowing they'll be bailed out by taxpayers if they fail. That's a moral hazard unlike any other. Let the market and consumer choice regulate the banks, and let there be no bailouts or FDIC. The FDIC creates a moral hazard, allowing banks to invest recklessly and run no risk of losing their deposits (because they're covered by taxpayers). The customers usually don't know or care about this, they feel safe regardless of the bank's reckless investment decisions. Without the FDIC, people would start paying attention to what banks are doing with deposits and wouldn't want to put their money with banks who make reckless investment decisions, and could lose some or even all of the deposits (meaning the customer's IOU is worthless when they come to redeem it and they're SOL). Banks would necessarily have to invest more conservatively under these conditions, because creditors won't buy bonds from a bank that isn't attracting customers.[/QUOTE] The FDIC is actually funded by the insurance premiums that member banks pay. Taxpayers don't have to pay anything. [editline]10th August 2012[/editline] FDIC also has certain requirements for banks to be covered, and drops coverage of banks that are too risky.
[QUOTE=Noble;37163241]I disagree profoundly. I would argue that it absolutely, entirely was the Federal Reserve's fault.[/QUOTE] Can you back up the claim that the Federal reserve was to blame solely for the Great depression? [QUOTE=Noble;37163241]It's not a silly claim, it's been the subject of numerous studies by world renowned economists.[/QUOTE] Like?
[QUOTE=The Kakistocrat;37174731]The FDIC is actually funded by the insurance premiums that member banks pay. Taxpayers don't have to pay anything.[/quote] Ultimately it is backed by the taxpayers though. If the FDIC ever became insolvent, the government would bail it out with taxpayer funds. [quote]FDIC also has certain requirements for banks to be covered, and drops coverage of banks that are too risky.[/QUOTE] Unfortunately that isn't consistent with what happened in 2008, when Washington Mutual collapsed from it's risky investments in sub-prime mortgages. The FDIC then took over the failed bank and sold it at a huge discount to JPMorgan Chase (which later resulted in a multi-billion dollar lawsuit by WaMU against the FDIC), so that no one lost their deposits. This was essentially an under the table subsidy to the large depositors whose deposits exceeded the FDIC's limit and would not have normally been covered. So basically what we have here is that a bank took risks and was not dropped, they later collapsed because of their risky investments and the FDIC not only bailed out the "normal" depositors (under their limit), but every single depositor. It hasn't set a very good example. [QUOTE=Sobotnik;37174866]Can you back up the claim that the Federal reserve was to blame solely for the Great depression? Like?[/QUOTE] Milton Friedman Along with Anna Schwartz, he wrote a very substantial book on the issue: [url]http://en.wikipedia.org/wiki/A_Monetary_History_of_the_United_States[/url] another: Murray Rothbard - America's Great Depression [url]http://en.wikipedia.org/wiki/America's_Great_Depression[/url] Full text: [url]http://www.mises.org/rothbard/agd.pdf[/url] - Page 85 - The Inflationary Factors
[QUOTE=Noble;37177681]Ultimately it is backed by the taxpayers though. If the FDIC ever became insolvent, the government would bail it out with taxpayer funds. Unfortunately that isn't consistent with what happened in 2008, when Washington Mutual collapsed from it's risky investments in sub-prime mortgages. The FDIC then took over the failed bank and sold it at a huge discount to JPMorgan Chase (which later resulted in a multi-billion dollar lawsuit by WaMU against the FDIC), so that no one lost their deposits. This was essentially an under the table subsidy to the large depositors whose deposits exceeded the FDIC's limit and would not have normally been covered. So basically what we have here is that a bank took risks and was not dropped, they later collapsed because of their risky investments and the FDIC not only bailed out the "normal" depositors (under their limit), but every single depositor. It hasn't set a very good example. Milton Friedman Along with Anna Schwartz, he wrote a very substantial book on the issue: [url]http://en.wikipedia.org/wiki/A_Monetary_History_of_the_United_States[/url] another: Murray Rothbard - America's Great Depression [url]http://en.wikipedia.org/wiki/America's_Great_Depression[/url] Full text: [url]http://www.mises.org/rothbard/agd.pdf[/url] - Page 85 - The Inflationary Factors[/QUOTE] sorry, I misspoke. They don't drop coverage, the take over and sell it, like you said. And yes, it is ultimately backed by taxpayers. But since the FDIC has never failed, or gotten close, saying that banks are bailed out by taxpayers is a gross exaggeration. And just a question: if a private firm were to offer an insurance plan to banks, would you be against it?
[QUOTE=Noble;37177681] another: Murray Rothbard - America's Great Depression [url]http://en.wikipedia.org/wiki/America's_Great_Depression[/url] Full text: [url]http://www.mises.org/rothbard/agd.pdf[/url] - Page 85 - The Inflationary Factors[/QUOTE] I would much enjoy it if you would take the time to actually explain why the Federal Reserve holds the sole blame for one of the biggest economic depressions in history.
[QUOTE=Sobotnik;37178447]I would much enjoy it if you would take the time to actually explain why the Federal Reserve holds the sole blame for one of the biggest economic depressions in history.[/QUOTE] It's a very good arguing trick to post links to what are essentially 100+ page long academic (and also awful in the case of Rothbard) works and then expect that to be a legitimate way to answer questions.
He already clearly gave his argument. Let me quote it for you, "Half truth. The stock market bubble of the 20's was fueled by the expansion of the money supply by the Federal Reserve, and they reacted too late when they realized what they were doing. They further exacerbated the problem by constricting the money supply too tightly. It's the cheap money that was poured into the economy by the central bank that was the source of the problem. That money had to go somewhere, and the stock market was very appealing. Loads of people were buying stocks on margin, share prices were on the rise (which attracted more people who wanted to get rich and further fueled the bubble). People assumed the party that was fueled by the federal reserve's monetary policy would go on forever, but as we all know, it didn't work out that way. Blaming "deregulation" for the Depression rather than the actual cause (the central bank) is sort of like blaming gravity for someone falling out a 12th story window to their death, and ignoring the person who shoved them out the window." He then sourced those books.
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