Forum Post: Seperation between main street and wall street
Posted 13 years ago on Oct. 14, 2011, 7:46 a.m. EST by ltjaxson
(184)
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One of the main issues has to be the seperation of commercial banks (main street) from investment banks (wall street) if we want to ever prevent another episode of 'too big to fail.' By allowing the two to merge (De-regulation and Monetary Act of 1980 and the repeal of Provision Q of the Glass-Steagal Act in 1999 by the treasonists Paul Rubin and Larry Summners) Wall Street can solicite Main Street deposits for its 'ventures' of profit and then when the cycle of 'boom and bust' takes place, rely on the very tax payers whose money they profitied from in the first place, and then gambled it away, to bail them out. Because if they dont, then they will never see their deposits again. Absolutely diabolical when you think about it...
I'll point out that regulation is usually encouraged by wall street because it pushes costs up for all which means large companies can more easily absorb it but smaller (main street) competitors cannot and thus it acts to protect the large businesses from facing competition.
Well that is the standard reply from capitalists. But this is not just another form of regulation; this is a proven way to keep wall street seperate from main street deposits, thus limiting their supply of capital to invest in risky ventures. If investor confidence is the solution to re-stabalizing the economy, then a stable economy should be the number one priority and re-implementing Provision Q is the best solution. Look at the recent findings of the Independent Banking Commission headed by Sir John Vickers in Great Britain and they have come to the exact same conclusion.
Actually the rule here disporves your entire arguement. The deregulated process of commercial banks from investment banks made it easier to eliminate competition and thus created 'too big to fail.' Too big to fail is the accumulation of banks into one central authority because of deregulation.
It is the standard reply because it is true. I mean even look at Obama's cabinet and advisory make-up. Goldman Sachs is main street?
The riskier ventures of our latest bubble was due to risks being subsidized by Fannie and Freddie and being fully backed up by the US taxpayer. Bad behavior was encouraged both by legal precedent (suing for not approving mortgages), artificially low interest rates, and the mitigation to the point of complete avoidance of risk.
There would be no "too big to fail" if the failure was not prevented by the government bailouts. Those big would have fallen and their assets redistributed in the market. This would create dramatic disincentive to follow that path including merging investment and commercial interests.
At every step of the way government intervention in the market caused the bubble, reinforced the bubble, and caused the damage of its burst to be felt by the 99% instead of the 1%.
Remove any of those actions by government and where we are now would not be nearly so severe.
That is exactly what the Hoover administration did after the crash of 1929 and everything compounded by his lassie faire approach. The purpose of Provision Q was to prevent another all-out depression. The govt. has now taken the fears of all-out depression and and replaced it with too big to fail. Either way, it is not speration between wall street and main street that had stablized the economy for over 60 years. If it such a recipe for dramatic disincentive, then why has the same episode of US history been replayed? Lassie faire caused the the great depression and veiled lassie faire is the result of too big to fail. Yes, the buble and subsequent bail-out was facilitated by the US govt., but that is the point! If we are going to have govt, intervention then lets have it in the form of stability, not volatile markets that revolve around boom and bust economics caused by free markets, govt. intervention or whatever.
The Federal Reserve cause the Great Depression. Milton Friedman proved it and even Ben Bernanke admitted it. See the bottom of my comment for quote and link.
What stabilized the economy for the last 60 years was the dollar being the reserve currency of the world because we bullied OPEC into mandating that oil be bought with USD. This allowed steady demand for dollars to exist while the Reserve printed money flooding the US with inflation mitigated only by demand. Our debt spending allowed us to live the good life for a time before our debtors came calling. When a bubble that they created collapsed they would simply create a new bubble - as Alan Greenspan admits he did when the tech bubble burst by creating the housing bubble.
We haven't had anything anywhere close to laissez faire since the entire monetary system was controlled by central banks in 1913.
I rather find government intervention being the cause of these economic troubles to be the point. You say "If we are going to have govt intervention..." why do you begin with that premise when it is proven for almost 100 years to be a negative? Can I say no thank you to government intervention? Isn't that an allowable option?
"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. " http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm
Of course you are allowed to express your opinion, but dont be suprised that your train of thought is widely discredited. The facts are that allowing banks to fail is bad and creating legislation that limits that possibility is good. The economy is stable when those regulations are in place and bad when they are not. Yes, the federal reserve may have contributed to the crash of 1929, but that is the point - unregulated banks, backed by the falacy of the fed need to be seperated to prevent accumulated, un-checked powers that will lead to another bank bail-out. FDR instituted a bail out program, but also implemented regulations to ensure it didnt happen again. Those regulations were repealed and it happened again. Plain and simple. The other arguements you bring into the picture, only strenghten that my thesis...right?
So you support the wall street bailouts but you're part of a movement that protests them? You don't see a slight conflict of interests here?
You paint such a simplistic picture of something as complex as our economy. You're argument appears to be nothing more from the form of "Regulation Good, Free Market Bad".
Read the quote and link again, read Milton's work - the FED did not "contribute" to the crash of 1929 - they caused it - "You're right, we did it.".
FDR instituted a bailout program. Compare the collapse of 1921 to the one in 1929. One was recovered from quickly because mal-investment was allowed to be destroyed and the market achieved equilibrium again fairly quickly. The collapse of 1929 was beginning to recover (with no bailouts put into place) when FDR started engaging in a bunch of programs to redistribute wealth which had the effect of destroying it. We didn't get out of that until the end of WW2 because 1. a lot of men were killed and no longer unemployed 2. the production ability of most of the rest of the world was crippled so they needed to buy things from us.
Allowing banks to fail is vital for a stable system. The market is rather organic in that aspect that the dead are used to nourish the growing. The assets of the dead banks would be split up to be used by the ones who did not take such risks. Their computers, employees, desks, office space, investments would be auctioned off to pay for debts and obligations. Thus the bailouts to those owed would come from payments from other banks and financial institutions eager to expand capacity to support those left out in the cold from the collapse.
To interfere with this process the government stepped in, propped up those that should fail and thus greatly reducing any incentive to change, prevented the toxic assets from going away (purchased by the taxpayer) and prevented the good institutions from being rewarded for not following down an obviously bad path.
I do not understand how you can defend such intervention let alone say that it is good.
I do not support bail-outs, nor do I support too big to fail. I do support seperation between commercial banks and investment banks to limit both. The only thing that has ever caused a recession is un-regulated banks... The economy wasnt on the road to recovery on the eve of the 1932 election. Hoover supported a New Deal like bank holiday that Roosevelt refused to lend his name to until he took office. The only amount of recovery after 1929 was thanks to New Deal and govt. intervention policies that Hoover tried to implement. Perhaps down the road the market would have recovered, but meanwhile millions of disillusioned people were starving, while the people who caused the problems (the 1 percent) were finally paying a 'progressive tax' plan. 'Allowing banks to fail is vital for a stable system', perhaps. But not when the are too big to fail. And preventing banks getting too big to fail can only be achieved through seperation between commercial banks and investment banks. We are not debating the pros and cons of free market capitalism because it hasnt existed for a long time. We are debating the reality of the current system. The 'organic' system that you described and what I would call lassie faire economics only allow other banks to accumulate wealth. So basically, we are just trading one criminal for another.
Of course you will argue that they are not criminals, ok. Answer this: How did these people gain their current position? My answer: through either inherited wealth or exploitation of the labor force. Either way it is just an extension of feudalism where the capital controls the labor force and I argue regulations allow (in small doses) for the labor force to control the capital. We all know how capitalism works - we just dont think it is very fair!
The market was already well on recovery when the New Deal was implemented. I am sorry but it seems you're dealing with information that comes from the common wisdom of several decade ago. Current analysis leads very little room to argue that the New Deal was beneficial.
There is no such thing as "too big too fail" it was an invention by Bush and co in order to support their friends in the banks. Nothing is too big to fail and supporting such a notion simply ensures that larger things (such as our entire monetary system) will fail. Eventually one runs out of entities large enough to do the bailing.
Who exactly am I saying is not a criminal. I am confused who you mean so its not likely I am arguing what you assume I am. What I argue is what I write - please don't assign motivations or beliefs to me that I have no stated.
I am a historian and academic at a very reputable institution and therefore very well read on the latest studies on this very subject which I teach. Most, not all, new publications that are backed by academic research suggest that recovery wasnt on its way, but Hoover tried to implement similar policies that the New Deal backed, including bank holidays and the FDIC.
There is such thing as too big to fail, hence the dramatic chain of events that triggered the bank failures of the late 1920s and early 30s and left depositors of main street banks out of pocket. Bush and other members of our govt. did create the too big to fail policy, you are right. Mainly because they knew that the failed policies of Hoover would only lead to another bank failure and that would once again leave main street depositors out of pocket and open the political spectrum back to possibilities of social reform and distribution of wealth. They stopped it at the top so it wouldnt trickle down to the depositors once again. So yes, the bail out is more similar to the policies of FDR, but the Frank-Dodd Act failed to re-implement the seperation of commercial banking from investment banking that would prohibit the crisis from happening again. That is my arguemnet. As for assuming your position, I am sorry. I only thought that since you stood by your capitalistic convictions so strongly, you would take offense to me calling them criminals...apologies!
I am sorry but I will trust the papers I read over an anonymous appeal to authority. If you have citations or other specific information I'll be glad to read the analysis you're referring to.
There is no such thing as "too big to fail" - there is in politicians mind "too big to have the consequences of failure happen on my watch". If such a phrase were true then we wouldn't have to bail the company out because there would be no danger of them failing since they are too big to do so.
So in your mind it is better to increase taxpayer debt to absorb toxic assets and then have to pay interest on that debt and possibly monetize it via inflation thus harming all parties in the economy - than have those who were attached to the failure suffer (which happened anyway)?
The large institutions certainly made some idiotic decisions and should be punished for those decisions as the market punishes - as in the company has folded and you're out of job and your resume is stained with last place of employment being this shit hole.
Criminal? Only if they used fraud or force. Idiotic - absolutely.
Too big to fail on my watch...there would be no danger of them failing since they are too big to do so. You are missing the point: too big to fail means that if they do fail, we are all screwed because our deposists are mixed up with wall street's ventures. Yes, large corporations should be punished and allowed to fail, but the system doesnt allow that because there is no seperation between main street and wall street.
The root of all the problems that OWS supporters are protesting about is based in CAMPAIGN REFORM. Individuals (not corporations, not PACs) should only be allowed to contribute and that contribution should be max'ed at 1% of the average median income in the US (~$5000). Politicians should no longer be bought by business!!! This national movement should be organizing a constitutional amendment vote by the states - bypassing congress - to enact this reform.
While I agree that only individuals should be able to exercise such speech why do you wish to restrict the speech of individuals at all? My money is where my mouth is, its the highest form of speech besides sacrificing one's own life.