Forum Post: "What went wrong? Why did the world economic crisis occur . . . ? . . . abolishment of the Glass-Steagall Act "
Posted 12 years ago on March 21, 2012, 10:48 a.m. EST by nomdeguerre
(1775)
from Brooklyn, NY
This content is user submitted and not an official statement
"The complete abolishment of the Glass-Steagall Act in February 1999 was the main structural cause of the financial bubble in the United States and Europe from 2002 to 2007. It was abolished under the leadership of Treasury Secretary Lawrence Summers during the process of liberalizing financial markets in the late 20th century. The act was enacted in 1933 in order to divide the business of banking and securities in light of the tragic experiences of the Great Depression. Surplus liquidity created by an extended period of lax monetary policy in the first decade of the 21st century under the auspices of the Federal Reserve and Chairman Greenspan fueled a so-called money game by investment banks, which was inconsistent with the laws of real demand. Such policy and administration by the Fed and Treasury were the main causes of the bubble. " http://www.canon-igs.org/en/column/network/20120305_1283.html
It's very simple, unleashed Wall St. bankers crashed the world economy. First step: reinstate Glass-Steagall.
The cause of the bubble and collapse.
Interest rates dropped and many home buyers flooded the market. Had there been a cap on profits the home prices would not have gone through the roof. And many of those buyers would not have foreclosed.
The real culprit of the crash was the free market system. Unfettered profits gutted the economy. The salesmen were having a feeding frenzy. But eventually everyone stopped borrowing and spending, and that's when jobs began to layoff and the economy began to tumble. The whole thing was fueled by borrowing. But for a capitalist economy to function money must continually circulate. The wealthy profits did not circulate , and this killed the economy.
Again , a cap would solve the problem. Then and now.
What would be the mechanism of determining profit caps?
As I see it, the salesmen (mortgage brokers) went into a feeding frenzy because of the myth of a risk free capitalism. Individually, the brokers had no risk, so they just wanted people who would sign on the dotted line. Financial instruments (mortgage backed securities) were invented that supposedly spread the risk so broadly that there was no risk. These people were insane.
A society cannot allow their financiers to invent "financial products" at will. A financial service sector has to serve the larger economy. If finance doesn't drive the economy forward it becomes a looting operation, legalized (or not) criminality.
Glass-Steagall insured that commercial banking would serve the larger economy. In 2008 Glass Steagall should have been reinstated, the banks put through bankrupty, and the speculative investment banks allowed to survive or fail on their own.
Determining the profit cap ?
You asked the most important question.
I have determined the cap would have to correlate with federal interest rates. When fed rates go up or down so will profit rates respectively. The reason for this correlation is this : when the fed wants to stimulate the economy they lower interest rates which encourages spending and stimulation. With the correlation of the cap ,profit rates will also be lowered.
Would the cap be a 1 : 1 ratio ? That might need further discussion.
Well, then maybe OWS should focus more intently on this issue. I mean, if I go through the protest announcements over the last couple months, not a single one was promoting the restoration of Glass Steagall.
Yes, it totally sucks that a kid was shot and killed by some yahoo, possibly due to the mere pigmentation of his skin and the type of clothing he was wearing, but understand this people, that ass hole would have been charged with murder in New York state, so this issue concerns Florida state law. During the Civil Rights era, Martin Luther King wasn't marching downtown Manhattan to defend civil rights in Alabama, he was marching in places like Birmingham (ground zero of where the shit was happening).
At this point, this whole thing is becoming a feel good movement. It's all over the place, a new issue every minute, without any apparent regard for effectiveness. Yes, OWS changed the conversation, but it's not exploiting its early successes.
I believe we should focus on core issues that would restart a jobs economy and reign in looting by Wall St. banksters (such as Glass-Steagall). That should be our banner that we march under.
At the same time, we have to respond to the ills of the world as we see them.
I hope your last paragraph is not true or does not remain true for long. I saw your post on the problems of consensus decision making: http://occupywallst.org/forum/this-structure-is-designed-to-just-reinforce-group/ . The problems you cite there can indeed lead in this direction.
Bill Moyers interviews Senator Byron Dorgan
http://billmoyers.com/segment/byron-dorgan-on-making-banks-play-by-the-rules/
Here's a link to Senator Byron Dorgan's speech in 1999 in which he predicted that the end of Glass-Steagall would be pernicious for our economy.
http://www.youtube.com/watch?v=w2nZbo8SKbg
Great.