Happy 10th Anniversary of Glass-Steagall Repeal -- an email exchange.

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My Original Email
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On 10th Anniversary of Glass-Steagall Repeal, Watchdog Says Bailout “Almost Certainly” Will Result in Taxpayer Loss
The top oversight official for the $700 billion Wall Street bailout says the program will “almost certainly” result in a loss for US taxpayers. Special Inspector General Neil Barofsky also says he’s conducting sixty-five probes into possible fraud by bailout recipients. Barofsky’s comments came on the tenth anniversary of the repeal of the Glass-Steagall Act, a key deregulatory move widely seen as helping lead to the nation’s financial collapse. The repeal ended the separation of commercial and investment banking. In this clip from before the 1999 vote, Senator Byron Dorgan of South Dakota predicted how the repeal would be remembered on its tenth anniversary.

 

Sen. Byron Dorgan: “We are, with this piece of legislation, moving towards greater risk. We are almost certainly moving towards substantial new concentration and mergers in the financial services industry, that is almost certainly not in the interests of consumers. And we are deliberately and certainly, with this legislation, moving towards inheriting much greater risk in our financial services industries. And so, I come to the floor to say that I regret that I cannot support the legislation. I think we will, in ten years’ time, look back and say we should not have done that, because we forgot the lessons of the past.”

 

 

 

http://www.democracynow.org/2009/11/13/headlines#7

 

 

 

 

 

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His  Response:
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There was a lot of controversy surrounding that decision back then. 
 
Not everything that led to this crisis is because of that repeal.
 
Remember that the government propped up Fannie and Freddie and allowed people who cannot afford to buy a home, afford one.
 
If Fannie and Freddie don't exist, derivatives are not rated AAA that were not truly AAA and so banks and businesses aren't caught with these.
The financial picture would be different.
 
Many would say if Fannie and Freddie did not exist, many people couldn't afford a house. To that I say sorry. Save more while renting like the rest of us did.

 

 

 

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My Response:
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It's a very odd system really.  Fannie and Freddie aside, I think our monetary system is tragically flawed.  It works, and has worked for us well, but we've laxed regulations that used to control known flaws -- and today, I feel, those flaws have been exploited.
 
As we discussed already the Fractional Reserve system of Banking...   some 95-97% of all money in "circulation" is commercial money created when consumers chose to take on debt.
Knowing this allows us to understand that basically all US currency is the Principal of a loan.
 
In circulation we have P but owe P + I
 
In order for citizens to acquire the money needed to pay the Interest in addition to the Principal more money must be injected to the system -- the ability to easily allow consumers to make payments on P+I owed is done by contributing to inflation.
 
The Federal Government can borrow from the Federal Reserve and add additional currency by giving public jobs to citizens, or consumers themselves can take on loans from the bank, resulting in the creation of commercial money -- regardless, this new money represents only the Principal of a new loan... adding again to the total P + I collectively owed creating the need for even more inflation.
 
Unless we wish to allow defaults on loans, foreclosures, bankruptcies and a general loss to the public at large -- a self perpetuating loss of consumer confidence to borrow and spend -- we must maintain an ever growing injection of debt to give us the ability to pay the P + I on our debt money.   Again, we can either increase government spending (through tax and spend, or Federal Reserve borrowing) or increase the available commercial money by an increase in consumer loans.
 
Those who disagree with idea of government borrowing and taxing in order to spend are likely to promote consumer borrowing -- which we saw first through massive credit programs which allowed many a "new" car, followed by the ease of obtaining a mortgage and the housing boom -- in order to inject more currency into circulation.
 
All of this commercial money created through this boom of consumer debt had made so much money available it had been easy for consumers to maintain their payments of P+I owed.  More money in turn was available to these businesses to spend on goods and services which provide jobs... more money too was borrowed by businesses because there wasn't some percieved near-future inability to pay back these debts... . homeowners gained lots of equity in the housing boom as well, allowing for even more loans.. .    you know, this self perpetuating cycle of success through the creation of debt.
 
But, something happened. 
 
Even though so much more money was created, it all wasn't being kept in circulation.  Much of the Interest on these loans is kept as profit, it isn't all spent --  it is saved and invested and otherwise kept out of circulation.  Also, during the boom years, we saw such a vast majority of the record profits going very disproportionately to the already wealthy -- not distributed amongst those who need it to pay the debts they owe.  
 
Basically, not enough money was made available to those who took the loans.  I think there are a couple ways to correct this -- as I suggest above, we could be distributing the profits a bit more evenly to workers as well as owners/CEOs/etc, or we could tax those who benefit most from the current system and allow the government to create public jobs (not simply award contracts to the largest players in the industry if we can avoid it -- much would be lost on its long trickle down to those at the bottom of the economic ladder.) -- either way would put more money in the hands of consumers and minimize loan defaults, bankruptcies, and the loss of confidence that results in a self perpetuating cycle of failure.
 

 

I do have a point to this rambling -- it's very likely that, while you (and many others) would blame Fannie and Freddie, consumer borrowing was something heavily promoted in order to keep the monetary system from collapsing earlier.