“It’s all right to let Wall Street bet each other millions of dollars every day but why make these bets affect the fellow who is plowing a field out in Claremore, Oklahoma?”
My all time favorite Cherokee, Will Rogers, wrote that in 1924. Today, most of the fellows plowing fields in Claremore, OK, are still Cherokee—but a lot fewer of them own the land they are plowing.
Nine years after Will Rogers made that complaint, the New Deal was beginning to roll, and Congress passed the Glass-Steagall Act in response. Glass (D-VA) and Steagall (D-AL) created the Federal Deposit Insurance Corporation. In the Great Depression, when a bank went belly up your money was just gone. Even now, it’s not widely known that the FDIC does not cost the taxpayers a penny. Fees assessed on the commercial banks fund it.
Just as important, the Glass-Steagall Act created a firewall between commercial banks and investment banks. Investment banks were not insured by the FDIC, did not have to pay the assessments, and were free to gamble with the money of anybody dumb enough to entrust it to them for the purpose.
Commercial banks are the places you go to get your crop loan, your car loan, or your mortgage. They had strict capital reserve requirements, which placed a limit on the amount of “leverage” they could bring to bear—that is, the multiple of customer deposits they could invest.
Bankers always thought this limit cramped their style, and I suppose it did. They were free to gamble with their own money, but they were limited in how much they could gamble with the money deposited by that fellow plowing his field in Claremore, OK.
This terrible injustice to the banksters, I mean bankers, was corrected by Gramm (R-TX), Leach (R-IA), and Bliley (R-VA) in 1999. Their bill, tearing down the wall between investment and commercial banking, was signed into law by President Clinton, who should have known better, but the political zeitgeist of the times was still deregulation. “Government,” in the famous words of President Reagan, “is the problem.”
Phil Gramm was John McCain’s principal economic advisor until he got canned for referring to Americans as “a nation of whiners.” The “whiners” did not know it at the time, but the gamblers unleashed by Gramm’s deregulation had leveraged their assets 30:1 and had, by spinning out derivative instruments of mind-bending complexity, become “too big to fail.”
That is, if they went broke they would take down so many businesses and people with them that the farmer in Claremore would get knocked right off his tractor. Of course, some people doubted any investment bank was “too big to fail,” and so the folks in charge let Lehman Brothers go down in 2008, apparently to see how bad it could get.
The Dow Jones average took the greatest one-day dive in history and racked up a trading range of 1,000 points. Lehman’s failure set off a cascade of smaller failures that played out for months. If you once had a retirement account but you don’t anymore, you can thank that experiment.
I remember back when I was young enough to be shocked, an undergraduate at the University of Texas. A law professor who was on President Nixon’s defense team in the Watergate scandal was asked whether some new cover-up revelation was “serious.” “Serious?” the professor asked, “the Dow Jones dropped fifty points on the news!” Fifty points. Serious. How times do change.
So we had to bail out the banksters from the consequences of their own recklessness or kiss our retirement plans goodbye. No problem, right? Wasn’t the major issue of the 2000 elections what to do with the budget surplus?
It was the issue, indeed. Bush said, “it’s your money and you know better than the government how to spend it.” Al Gore said this is our chance to “put Social Security in a lock box” and end the bipartisan accounting tricks with the trust fund.
Oh, now I remember. Bush won, and cut our taxes.
“When a party can’t think of anything else they always fall back on Lower Taxes. It has a magic sound to a voter, just like Fairyland…”
Will Rogers wrote that in 1924, not 2000, and in the same year he expressed the only thing that will get us out of this even if we do, as Occupy Wall Street demanded, quit allowing unlimited gambling with other people’s money:
“People want just taxes, more than they want lower taxes. They want to know that every man is paying his proportionate share according to his wealth.”
Maybe I’m biased by my Cherokee genes, but any man who could write that in 1924 deserves our attention today. There was about to be an event called the Great Depression.
I'm an old retired guy now, and I've taken up stock picking as a retirement hobby, having never owned a share of anything directly before 2008. So I pay some attention to investment news.
This just in from Golden Sacks, the Great Vampire Squid that led our economy down the tubes and got bailed out rather than prosecuted.
I don't pay much attention to investment banks other than being careful not to invest in them, but they have fans among rich people.
For the record, I agree on the price targets for the ones on this list I own: GM, VTR, and SLB. In the past, I've owned the following, and I guess Golden Sacks is telling me I got out too soon (entirely possible; I suck at picking sell points): MPC, VMC, AMAT.
I've stalked the following but never had both money and a good entry point, so Golden Sacks is saying I'm not too late: QCOM, FSLR.
Goldman strategist David Kostin has identified what he thinks are the top 40 most undervalued stocks; at the time he issued the note yesterday, each stock had at least 20% upside to his price target.
The list: MPC, ADSK, VTR, CRM, AMT, SPG, HAL, DVN, EXPE, SWN, R, ESV, BRCM, CAM, NBL, WYNN, WYN, NE, VMC, PSX, NBR, CCI, APC, EL, NFX, FSLR, GM, YHOO, CERN, EOG, CTSH, GT, QCOM, MON, VLO, SLB, PCP, AMAT, BMY, NOV.
Then, the very next day, Yahoo Finance ran a story pointing out that the "most improved brand" in the country this year was....Golden Sacks!
http://finance.yahoo.com/...
Not only Golden Sacks, but several other really evil investment banks are buying their way back to the public's good graces while working like hell to neuter Dodd-Frank in the rule making process. I fear the sheepies will get sheared again much sooner than they were after the Grand Shearing in 1929.
I guess I should be careful about "evil."
How can I refer to gambling as "evil" when I play poker once a week and pick stocks for a hobby?
Well, for openers, I only gamble with money I have earned rather than money I have borrowed. As a retired guy on a fixed income, that means if I lose, I'm done...which brings me to...
I don't expect the taxpayers to absorb my bad bets.
I may be morbidly obese, but I am not "too big to fail."
I'm told that Will Rogers used to play cards now and then...with his own money.
If you can take advice from a couple of Cherokee gamblers, I concur with Will Rogers that it would be good to shut down high stakes gambling with other people's money.
The closest thing to that in Dodd-Frank is The Volcker Rule, which is supposed to ban proprietary trading by commercial banks.
The Dodd-Frank rule making process remains infested with more investment bank lobbyists than the number of fleas on an Oklahoma jackass. If that infestation is not overcome, it will be good news for Golden Sacks but very bad news for that farmer in Claremore.