Monday, November 2, 2009

Regulate Wall St

Wall St is supposed to finance economic growth, funnel society's scarce capital into things that make us healthier, wealthier and wiser. Most economic activities require a lot of cash up front before they pay off at all. You have to pay construction workers while the building is under construction. Money from the sale of the building, or rent, doesn't come in until AFTER the building is finished. Manufacturing automobiles, airplanes, consumer goods, machine tools, damn near anything, requires paying the workers, and the parts suppliers, long BEFORE the product is shipped and paid for. To say nothing of paying for the factory. Most business is like this, you need to borrow money to get things going long before the profits come in. No loans, no business.
Wall St firms are SUPPOSED to take investor's spare capital and lend it to businesses that need it. Unfortunately, a lot of them were using investor's funds to play poker with each other. The entire "credit default swap" swindle was such a poker game. Credit default swaps sank AIG for $150 billion taxpayer bailout. The "secondary mortgage market" aka mortgage backed securities, sank Lehman and Merrill Lynch. In short, regulation should encourage loans to real businesses, and discourage gambling between themselves.
Banks in particular need regulation to keep them from gambling with FDIC insured funds. The real free market, where firms fail and go out of business when they do stupid things, or are merely unlucky, is stressful. Bank failures are painful, not only for the bank, but for all the depositors who loose their savings. The pain was so intense, that back in FDR's time, Uncle Sam guaranteed bank deposits. If the bank goes broke, Uncle pays off the depositors. No too big to fail here, Uncle guarantees EVERY US bank. With that kind of backup, we need stiff regulations to prevent banks from doing risky things with taxpayer money.
For instance, the depression era Glass-Stegall act used to prevent banks from playing the stock market. Banks lobbied against Glass-Stegall for 50 years and finally got it repealed under Clinton. Big mistake. Great Depression II was caused by banks speculating in mortgage backed securities, credit default swaps, and the stock market. We ought to outlaw all three activities for FDIC insured banks.
Let the un insured hedge funds do the gambling, not taxpayer insured banks.

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