Obama inherited a banking crisis that had spiraled way out of control. On the eve of the largest impending collapse of our banking system, Obama was sworn into office and almost immediately began to piece together a solution to a farreaching financial problem that had its roots in the banking industry. Leading him to the controversial insistence, along with Geithner and Bernanke, that a gigantic bailout for the nation's banks was in order. This has happened before in American history (well, not the huge monetary bailouts). In 1933, Roosevelt’s highest priority, during what turned out to be an extremely busy first 100 days of his presidency, was the farreaching financial crisis that had its roots also in the banking sector of the United States. Roosevelt was inaugurated directly in the midst of impending crisis when all over the nation, even in Roosevelt’s home state of New York, banks were experiencing an extended holiday while a major financial hiccup was being analyzed and dealt with. Stemming from a network of unit banks acting as affiliates, a microcosmic example of a large-scale problem triggered a nationwide panic. Henry Ford’s personal network of banks (figuratively speaking) were found to be doctoring and concocting different fraudulent mechanisms to boost the reputation and deposit reserves of some 32 financial institutions, all associated with Guardian Detroit Union Group, Inc (the financial arm of the Ford dynasty). The reasons for these misrepresentations lay in the ill-advised loans, bonuses, and benefits that 52 of 61 financial directors and 33 of 43 banking officers all received. The inherent problem here is the mismanagement of business practices for the benefit of powerful individuals and entities like Henry Ford, Ford Motor Corporation, and the allies within the financial sector that supported him. This one example of a greater problem was the proverbial straw that broke the camel’s back. Once broken, the question became: How to regulate and progress the banking industry from its depths?
The answer came in the form of FDR cajoling together financial and economic heavyweights from congress, in this case Senators Glass and Steagall along with other financial advisors. The result of this brainstorming was the Glass-Steagall Act. The touchstone issues in the subsequent Glass-Steagall Bill of 1933 were two-fold. The first provision was the inclusion of the Federal Deposit Insurance Corporation (FDIC); which was basically a glorified savings account taken from public tax dollars and small increments from Federal Reserve member banks that would insure depositors most, if not all of their monetary funds in the commercial banking sector. The second provision effectively separated commercial banking, which is the traditional model where citizens hold their money in banks with interest accumulating in exchange for the bank's ability to use those funds to generate loans, from investment banking, which is the usage of bank reserves to put forth in other investments and loans that are much riskier and often repackaged and retooled as bonds, mutual funds, stocks, mortgages, etc...The inclusion of the creation of the FDIC was controversial but necessary for its context. It ensured to the masses that their deposits would never disappear; it stopped the phenomenon known as "bank runs". It was controversial because it was the first version of a law that protected bad business practices in the banking industry. If a bank failed, it was not responsible for refunding its customers; the FDIC fund would ensure a return on the deposits. While this alone is troubling, the provision of stopping private corporations from doing both commercial and investment banking was supposed to give banks less incentive to make bad decisions with the reserves they have accumulated through deposits. This part of the Glass-Steagall Act was mutually agreed upon by many experts as well as Roosevelt himself.
I have spent so much time discussing what is known as the first great economic downturn in the modern era that now I feel the need to make this information somehow linked to our current predicament in regards to the all-important American banking industry. In 1999 the section of the Glass-Steagall Act that seperated the two forms of banking was repealed. Interesting...........it now starts to make sense how this so called "unexpected" financial collapse commenced itself via the repeal of Great Depession Era legislation. The passage of the Gramm-Leech-Bliley Act, as it is known, is detailed here.
If you can put two and two together, which is sometimes tough when discussing such a boring subject as banking regulation, this bill allowed companies like Citigroup, Goldman Sachs, Freddie Mae and Fannie Mac to be able to dabble in multiple markets simultaneously such as the commercial banking sector, the mortgage industry, the stock and bond markets; which basically, when pooled together can be called the speculative wealth marketplace. In this sphere, companies such as, I don't know, say, Goldman Sachs, can buy and sell the rights to the mortgages of millions of Americans, just as an example (which did happen: Goldman Sachs overvalued a large amount of mortgage securities on purpose so they could sell them to other investment firms just before the mortgage industry bottomed out). The scenario I described earlier in regards to Ford Motor Company and its financial subsidiaries' money mongering is child's play compared to the vast complexities of financial instruments that have been invented by companies like Goldman Sachs in the last decade. To hear more about the repeal of parts of Glass-Steagall, John Stewart has a great interview with Elizabeth Warren about its effect on the world financial crisis we are currently weathering. Like Ford's executives in the 1920's, many specters of the current financial crisis just love to award themselves fat bonuses for a job poorly done. Thanks FDIC! Thanks Government Bailout!
Interestingly enough, good ole' boy moderate, John McCain, in 2009 called for the return of banking regulations such as those included in the aforementioned Great Depression legislation. There is a great article in Newsweek describing McCain and others' (including former Fed Chairmen Volker) call to restructure our banking system.
That is all for now, come back for more! We will be detailing in the coming editions, the players complicit in the financial crisis, those who are trying to do something about the power of big banks, and of course what measures are being talked about or perhaps are already on the floor being debated.
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