krebscycle

There are three main problems with our financial system:

1. It allocates capital to stupid and destructive things and starves productive ventures.
2. It is monopolistic and expensive – imposing fees for not very good service on the rest of the economy
3. Due mostly to (1) it periodically collapses into panic and requires government rescue

Glass-Steagall and other components of the ugly compromises involved in fixing the banking crisis of the Great Depression address exactly none of these problems. In fact, the banking regulatory system set up in the 1930s generated many of the problems we have in finance today by building a huge government subsidy into the financial system in ways that are hard to eradicate. Furthermore, finance has changed in 80 years. Bank reformers of the 1930s did not have a  shadow banking system, a bond market anywhere like todays , or international banking anywhere near the scale that we have now. For example: much of the CDO/CDS casino at the heart of the 2007/2008 financial crisis was engineered by European banks, non-banks, and investment banks that were never covered by 1930s bank regulations. When AIG FP based in London sold derivative coverage that allowed Deutsche Bank to create synthetic CDOs  over securitized US mortgages, synthetic CDOs  that were purchased by German Industrial Development banks under cover of fake credit analysis by ratings agencies- almost the entire operation was outside of the regulated framework of 1930s banking regulation. The only exceptions are that it was that 1930s regulation that made the ratings agencies so central and the New Deal FHA agencies that fueled securitization of mortgages . Much of our bank panic was due to German political process that redistributed money that should have gone to productive German workers into vast capital pools that went into gambling. Nostalgia for Franklin Roosevelt in this situation is as productive as nostalgia for the gold standard or for barter for that matter.

And all this is even more stupid because there are obvious real fixes

To fix (1) we need to get rid of (a) tax subsidies for gambling, especially with other peoples money and for offshoring and  (b) end the use of wall street’s rating agencies as a legal dodge for lack of due diligence.  In fact, many of the tax policies advocated by the Bowles-Simpson commission would help: end of the capital gains subsidy and the even worse PE pretence that commissions are cap gains, end of the offshore tax haven for corporate profits, etc. etc.  If the government tax policy favors gambling with OPM (other people’s money), managers of OPM will gamble. And the laws that allow managers of other people’s money to rely on ratings agencies opinions to make bets on ponzi schemes legally “prudent” are a disgrace. If you manage a mutual fund or a pension, you should do your effing job or find another career. And a public infrastructure investment bank of the kind that President Obama advocates would be a good start – the US should be making investments on a large scale and not just in infrastructure. Note that Tesla had to get a loan from the Feds because the “capital market” was not interested.

To fix (2) we need to  strengthen the CFPB – the biggest reform in finance in 50 years – but ignored by so-called finance reformers. 

To fix (3) we could also provide a public alternative to private banks.

There are many other possible useful reform policies, but “Glass-Steagall” is not one of them.