Understanding too Big to Fail; Glass Steagall & the Volcker Rule

Always, it is the forgotten man who suffers when Big Banks are Dishonest 

To Regulate or not to Regulate; that is the question . . .

robtheworld

Small Business (organized right)  employs more than all the high tech companies, more than Walmart, Ali Baba, and Amazon added up together. Wipe out the small businesses, each with two or three or twenty employees with BAD LEGISLATION and (like Obama) you destroy the smaller jobs that keep the economy afloat.

So how do we rate the new Trump, Treasury Secretary?

The only thing on which he is firm is that there will be no bank bailouts. Well good.

The Vocker rule? he kind of likes it. Does he favor Glass Steagall; maybe and maybe not?  Is he in bed with the big bankers? Looks like that but not necessarily so. This dissembling may not be a bad thing at all, at all.  We should give the man a chance. Now is not the time to rock the financial boat.

NOTE: GLASS STEAGALL WAS A CAMPAIGN PROMISE.  It was even written into the GOP platform.

To clarify, the Volcker rule puts limits on the ability of banks to bet with money entrusted to them by depositors.

Glass Steagall on the other hand. cleans up the confused identity in banking. It forces banks to be either an Investment Bank or a Commercial Bank.

An Investment Bank buys and sells bonds, stocks and other investments. They assist new companies to go public with their initial offering. (IPOs) When we think of Investment Banks we also think of market or economic liquidity. Investment Banks fulfill their purpose (contribution to the social contract) better with fewer regulations. They need  governed by common sense rules that are simple and clearly defined. Now after fifly years of confused identity, it is a hornet’s nest. For example, the rules governing derivatives badly need clarified, and overhauled. Derivatives have formed a banking bubble and we now have more “too big to fail banks” than we had in 2008.

Commercial Banks on the other hand act as managers for deposit accounts. They serve both individuals and small businesses.  In the ideal the money they take in is lent out to individuals and small businesses and the economy grows.  Because they deal with the little man, or small businesses that are somewhat frail, they demand more oversight.

In September 2016 we had the Wells Fargo scandal. The employees secretly created millions of unauthorized bank and credit card accounts — without their customers knowing it, they were charging them phony fees and making off like a banshee. Wells Fargo employees secretly opened unauthorized accounts to hit sales targets in order to receive bonuses. Commercial banks need oversight.

NOTE: Like 2008 when no banking executives were prosecuted, the Wells Fargo CEO resigned and walked away free of blame. Hello?

TBTFThe seeds for the 2008 crash were sown on Bill Clinton’s watch; an inept president and his greedy banking cronies who took advantage. The economy was turned around after the 2008 crash. It took taxpayer bailouts of both American and Foreign Banks. Obama and Bernanke saved the system, but failed to fix the problem. It is the “Mom & Pop” small business that trusts these banks.  It is also the “Mom & Pop” small business culture that fueled what economic Obama recovery there was. If these little businesses get wiped out in a banking crash, or by over-regulation, it would be a bad, sad day for America.

With this in mind the new government may look at being proactive and enacting Glass Steagall. It is also a way to break up the big banks that is fair. It simplifies things.

Note well: It was the crash of 2008 that brought on the income inequality that now puts our culture at risk.

A little background on Glass Steagall:

In the roaring twenties there was so much easy money in risky-investments that several big Wall Street banks began salivating. They then decided to pull the deposit money out of trusted accounts and use this money to speculate. It wasn’t their money and it wasn’t ethical, so it all went appetite over tin cup; bankers jumped out of high windows and America went a slipping and a sliding into a great Depression.

The Glass Steagall Act of 1933 is a set of good reforms that ushered in a crisis-free period in USA financial history. We should learn from our past mistakes.

1933 the evidence of banking corruption was irrefutable: After the then ethics investigation, it was found that BANKING & BROKERING WAS A POISONOUS MARRIAGE. This little story illustrates the point.

“Young Bobby has just turned thirteen and in honor of his teenage status Dad has decided to give him a weekly allowance.  Bobby is a born entrepreneur and he and his neighbor friend, Goldy owned a lemonade stand (this was in the days before bureaucrats made this kind of endeavor illegal)

Goldy like Bobby, was also a producer and although young,she had a knack with food and drinks. Their little corner business was popular for the word had gotten around that stopping there was well worth the wait. So it came to be that Bobby had not only his allowance but also his profits. What to do with all the extra money?Bobby went to talk to Dad.

Dad called the boys together to educate them about income and outgo and savings – it seemed the right time. (Bobby had a big brother called George and Dad included him) Dad gave the boys a collective savings bank (his first mistake) and entrusted the bank to George’s care; after all he was the oldest and he was tall enough to reach to put the box on top of the closet. (Dad’s second mistake)

There was one small problem that neither Bobby nor Dad figured into the equation; George was into Pokeman Cards and his obsession had quickly got him outspending his own allowance.  George unlike Bobby and Goldy was not a producer, he was a gambler. Are you surprised that he began to steal from the box? 

As time went along it got hotter; summer is the best of all times to sell lemonade. The little entrepreneurs decided they needed a canopy. Bobby asked to get the savings-box down and was devastated to find that it was empty. What were they to do? They really needed that canopy! It was hot. 

George whined that he had always intended to pay the money back; he suggested that Dad step in and make it right and buy the canopy for Bobby, after all Dad didn’t want to see his little brother suffer, right? George’s strongest argument (which Dad bought), was that Bobby wouldn’t have been able to do the Pokeman investing by himself, so he was really trying to help him. I mean what did Bobby know about Pokeman?  He was always out there making lemonade and Goldy was now also baking. George knew a man who knew a man who said they were going to close the stand down because the kids didn’t have a licence.

Should George sell all the cards, he wasn’t sure how much he could get for them now?

Bobby didn’t want silly cards, he wanted a canopy, a canopy to give him and Goldy and his customers good shade in the summer for his lemonade stall; a local enterprise that the whole, local neighborhood agreed was a gem, was a neighborhood thriving business.

Unfortunately Dad backed George, buying into the theory that might is right.

Dad was also intimidated by the bureaucrat, clipboard in hand who had come to call.

Dad did promise to buy Bobby a canopy for Christmas, but it was too little, too late. It would be cold for a lemonade stand in December, no canopy would be needed.  And maybe, after all long before then, the city would close down the best lemonade stand in the neighborhood.

This is how two enthusiastic and enterprising entrepreneurs bit the dust.

Of course they could still work their lemonade stand without a canopy, that is until the nearby bakery persuaded the authorities that they were stealing his business.

“What?” said Bobby. 

“Regulations are designed to protect established businesses that pay taxes,” said Dad.

“Duh?” 

The lemonade stand continued for a brief while for it was still popular but it wasn’t the same. Then the city closed them down.

Neither Bobby, nor Goldy would ever recover from the betrayal after trust. It would stay with them and limit them as entrepreneurs for the rest of their lives.

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mom&PopPurists argue that we should let the big banks be forced into bankruptcy for that is how a free market system works. The American voter thinks this banking danger has gone away, but all that has happened is that it has been swept under a dirty carpet that is still big banking today.

It all comes back to a good law deliberately wiped out for banking greed and one inept President who lacked any kind of personal integrity.

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Bobby said to his Dad, “I think I will put my money in a real bank next time.”

Oh yeah?

Until the banks get their act together not such a good idea Bobby?

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Quote for the Month

Banking is a very treacherous business because you don’t realize it is risky until it is too late. It is like calm waters that deliver huge storms.

Nassim Nicholas Taleb

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 About the Author
Lynn Verhoeff (Grandma Thunder) has published two books, “Politics IOU” and “Magic Money” both on Kindle.  The first is satirical about banking and the second, examines the conflict of our times, Globalism vs Patiotism. You can read more at fb Grandma Thunder – an Independent Voice or Blog/Grandma Thunder  or  Free Books by Grandma