So here we are in the middle of another Wall Street financial meltdown, Congress is pointing fingers, economists are hypothesizing about it’s length and cause, and pretty much everyone’s a bit worried about their own financial future. As we learn more details surrounding the triggers of the crisis, I can’t help but think back to my college finance and economic classes and the lessons on the causes of the Great Depression. Seems to me that the commonality between them is that lawmakers and regulators allowed our banking and financial institutions to get “too big to fail” without the necessary checks and balances to ensure solvency.
In the case of the Great Depression, the fact that banks controlled everything from insurance, to mortgages, to deposits lead to a very rapid economic crisis once their liquidity evaporated and the paper profit balloon deflated. To address it, Congress enacted Glass-Steagall to limit the potential size of the financial institutions and the limit the breadth of future market liquidity crisis. It did a lot of other things as well, like create the FDIC, but I focus on this one aspect because it was repealed in 1999, again allowing greed to creap from the banking industry to other industries. The elite economists, arrogant lawmakers, and butter tongued lobbyists convinced the American people that these protections, created by our grand parents whom had suffered through a depression and wanted to prevent future generations from having to relive it, were so 1933. Regulators were way smarter now, and the industry had learned it’s lessons and could regulate itself.
What a dangerous concept to allow a group that holds everyone’s money to gamble with it without strong oversight and a willingness to accept that gamble from the depositor. Congress opened the door for these institutions to take risks in one part of their business knowing the government will catch them if they fall because of the link to the banking portion. I can’t understand how Congress forgot to see this when they repealed Glass-Steagall. In terms of industry stability, market focussed financial institutions are safer to the system as a whole. There’s a reason that smaller regional banks staved off this crisis.
If Congress really wants to fix the problems of the financial sector, they’ll act fast to fix the fundamental problem in our banking system, reenact legislation that will limit and separate the sizes of banks and what they can invest in. This way future meltdowns will be easier to contain, regulators will be able to focus on specific aspects of the industry, and you and I will be able to trust putting our money into banks. We won’t get the “Their too big to fail” line again in 15 years. But, if Congress doesn’t act, than maybe there is something to the words of Thomas Jefferson…