Earlier this month, Paul Volcker (American Economist and Chairman of the Fed under President Carter and President Reagan) stated that modern securitization causes banks to engage in speculative trading putting their customers and shareholders at too large a risk.
Gramm-Leach-Bliley tore down Glass-Steagall in 1999 under President Clinton. Glass-Steagall was a law that was in place to prevent diversion of funds into speculative operations and prevent the affiliation of banks, insurance, and securities companies. Political lobbying and economic pressure caused congress to overturn a law that had held our financial system together for over 66 years! Now we have banks, insurance and investments all under the same corporation - too big to fail.
The new financial reform bill (Frank-Dodd) has some provisions to abate speculation within financial institutions (ironically called "The Volcker Rule"). Will it be enough? JP Morgan Chase is under investigation currently for violating this rule and loosing over $2 billion due to speculative trading. Let's see what happens here.
Yes, Fannie and Freddie need to be overhauled with a serious dose of common sense (the ghost of Thomas Paine!) While modern securitization aids in allowing speculation by banks, it is not the reason the US banking sector almost collapsed in 2008. This was a direct result of the greed caused by enticement of lobbyists from banks, insurance companies, and securities firms to repeal Glass-Stegall and the fortune they stood to make (and have made).
No comments:
Post a Comment