What happens if we start all over again? Impossible, you say?
Well, I’m not so sure.
Let’s take the banks.
On second thought, you take the banks; I want nothing to do with them. However, if I must, I will.
First, return to Glass-Steagall and keep the fire-wall between investment banking and commercial banking.
No loop holes, no end runs, straight lending versus investment.
Since the elimination of Glass-Steagall in 1999, we’ve experienced the dot-com crash, the housing collapse, the credit crisis, and now the European meltdown.
So, how’s it working out for you so far?
In addition, for the last few years, in order to protect Glass-Steagall players, interest rates have been kept artificially low.
This action has deprived retirees and others of any return at all on CDs, saving accounts, or money market accounts.
This forces most to take risks they would normally not take in order to achieve returns that are desperately needed in order to make ends meet.
The argument goes if banks are forced to only be in the business of lending, they will not be able to make enough money.
They simply will not have enough assets to lend out.
This problem may be solved my taking the radical step of eliminating money market accounts at all institutions other than commercial banks.
Paul Volcker once said the beginning of the end was the creation of money markets. He said it forced the banks to get creative through financial engineering to leverage the money currently held on their balance sheets. Returning money markets to the banks would increase the lending pool and make banking profits grow.
I have no problem with securitization, derivatives, CDOs, CDSs, SIVs, and any of a dozen other products that have been created over the past several years.
My problem is when they blow up, and they usually do, it’s the taxpayer’s money (that’s both you and I) which is used to bail out the banks.
The return of Glass-Steagall and the elimination of money markets would be the first step in getting us back on the right path.
Maybe this time by “starting all over again” we’ll finally get it right.