On The Money with Peter Hebert

May 27, 2010

Financial sector reform finally here – it’s mostly money talk

Filed under: Legislation and Regulation — Peter Hebert @ 3:31 PM

The New Deal of 1933 meant financial sector reform. So much was wrong back then with the private sector completely unregulated and run amok. FDR’s Glass-Steagall Act of 1933 divided financial institutions into depository and investment-oriented businesses. This was the structural equivalent of engineering baffles into a ship the size of the Titanic so that it would not sink if it again hit an iceberg. Glass-Steagall was also known as the Banking Act. It was this nation’s first attempt at financial sector reform. FDR’s financial reform protected the American household and the broader economy for about 70 years.

Political and social activists throughout the 1930s had correctly pinned the nation’s economic problems on the Federal Reserve. What the Banking Act did not do, however, was repeal or amend the Federal Reserve Act. The financial sector hated Glass-Steagall’s Banking Act, because it curtailed their freedom, undermined synergies, and denied potential profits. By 1999, the Federal Reserve and member banks with their lobbyists rendered Glass-Steagall, the safeguard to the American economy, useless.

Capitalism had developed from monopoly capitalism of the late 19th century and early 20th century to financial capitalism of the late 20th century and early 21st century. That development rested on financial innovation, unregulated markets, and little to no government intervention. The end result was a synthetic economy divorced from the real economy where wealth transferred from the many and concentrated into fewer hands. The risk management that was built into the system by default was government intervention. The political crisis that would inevitably follow would fall onto elected leaders, not the banking establishment.

The secondary market for mortgages collapsed in July 2007 and the financial system came to the brink of entire collapse September 2008. This was not exactly a repeat performance of the stock market crash of October 1929 and the Great Depression that followed. Many of the contributing factors that led to the failure in the markets in the two eras, however, are similar. One was overvalued stocks. Hucksters and shills urged the masses to buy now. Another was accounting rules. The accounting rule scams of the 1920s were no different than the accounting rule changes permitted by the Securities and Exchange Commission today. One factor was different. Consider the sacrosanct economic text book theories taught in business schools. The efficient market hypothesis has proven to be pure nonsense. It is still taught. Institutional investors never understood the risks pension funds under their management were placed into. When our economy collapsed, it was much worse than the 1930s, because America’s collapse pulled down about 85 percent of the global economy, the 27 nations that comprise the G-20.

In May 2010, Congress told the American people that “for the first time ever” we have financial sector reform. Are we a nation of liars or do we despise the facts and record of history? Today’s financial sector reform is mostly talk. Beneath the misleading assurances from Capitol Hill is an ugly and inescapable truth. Lobbyists retained by the financial sector relentlessly fought against financial reform that would satisfy consumer advocacy groups, average investors, and the typical American household. The weapon of choice was money thrown at elected leaders. Money talks. But, who is listening to the voice of history?

Peter Hébert
Author of Mortgaged and Armed
Coming late-July 2010

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