Peter Wallison argues that banks were unsafe long before Glass-Steagall repeal | Business

A lot of people think the problem with our banks is that they tried to do too much. Peter Wallison of the American Enterprise Institute argues the opposite:

as banks have been forced out of lending to public companies–which in themselves offer significant diversification–they have focused more and more of their resources on fewer and fewer market sectors, particularly riskier kinds of business like commercial and residential real estate lending.

Starting in the 1970s, banks were shoved aside by securities markets as the main lenders to corporate America. So they got stuck mostly with real estate lending. And since Fannie Mae and Freddie Mac bought most of the plain-vanilla residential mortgages out there, the banks’ portfolios are full of commercial real estate loans and some high-end residential loans—not the most safe and stable mix.

The Gramm-Leach-Bliley Act that repealed the Glass-Steagall division between banks and securities firms was an attempt to address this problem. It didn’t really succeed at that, Wallison admits, but he thinks the basic idea was sound:

We need a policy that will enable banks to adjust to changes in the economy and the financial system in the future. If the GLBA is not effective for this purpose, then another mechanism should be tried. Banks should not be required–as they are now–to focus their activities only in the areas of the economy where they are still competitive. As long as banks issue deposits that are seen as government insured, however, they must be regulated and limited in their activities. The result, as we see today, will be continuing weakness in the banking sector.

It’s a really interesting argument. But I’ve got one problem with it: The financial crisis of the past couple of years did not begin in the loan portfolios of banks. It began in securitized debt markets that totally failed at assessing and spreading risk, then seized up and failed just like banks facing a depositor run. These securities markets had sucked lots of business away from banks over the past few decades, but in some cases (money market mutual funds spring to mind) they did so not (just) by being more efficient than banks but by taking risks that taxpayers eventually had shoulder to prevent a financial meltdown.

So it could be that the issue isn’t so much that we’ve been overregulating banks, as Wallison argues, but that since the 1970s we’ve been underregulating securities markets.

Update: Wallison replies.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

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deconstructiva

Do you think we’ll soon see transparent markets for derivatives like nasdaq or commodities with standard contracts, etc.?
tc125231

I dare you to find one argument by AEI that is based upon honest discovery via the review of empirical data. Their whole modus operandi is selective use of carefully picked facts, as well as the manufacture of facts, to bolster their dogma.
gatesvp

OK, I think it’s pretty clear that we’ve been underregulating securities markets. The (lack of) power of the SEC speaks volumes about the quality securities regulation.

But I honestly don’t think that the banks really have a problem of over-regulation. I think that they’re fighting the problem of increasing irrelevancy.

I mean, fundamentally, banks only do a couple of things. They secure deposits and they lend the deposited money to others with interest.

The process of accepting deposits is becoming less and less relevant in a world where most of the money is digital and most of the transactions are digital. Much of this stuff is just commodity now. The process of lending
money is equally digital and has been encroached upon for decades by others with their own big pools of money. If you look at P2P lending, you’re seeing one of the death knells of banking as we knew it. I mean, we don’t even need banks to lend our money for us, in 5-10 years, it’s going to be pretty easy to do it yourself.

So it’s hard for me to say decisively that we’re “over-regulating”, because I can’t really separate the
“regulation” from the fact that “banks are dying”.

I strongly suspect that the “over-regulation” may actually be the early stages of a long-term government replacement of electronic money. At some point, we the voters, don’t really want people to be making profits of the simple interchange of money. We’ve been allowing the government to manage the fundamental movement of paper currency for centuries, I don’t think it’s far off that they decide to commoditize the movement of electronic currency. I mean, they’re already insuring most of that money anyways, the bank is just kind of a dumb proxy.
ps56penn62pr64

Compared to the privately owned Federal Reserve and the banking system that own it, Bernie Madoff’s $50 plus billion Pozni scheme was very small potatoes.

America’s money supply, with the exception of coins minted by the government, is created as loans. While the Federal Reserve loans money directly to the government by purchasing US bond, commercial banks create the majority of our money using fractional reserve lending procedure. When making their loans, both the Federal Reserve and commercial banks create only the principal of their loans. Repaying the loans requires all the money the banking system created plus additional interest payment, the bank’s profit. Because no bank creates the interest, borrowers always owed more money than the banks created making the contract impossible to fulfill when considered as a whole.

To compensate for the shortage of money in the economy, banks continually originate new and larger loans, increasing and creating an expanding pyramid of debt, the newly created money drawing value from the existing currency, diluting the value of existing currency and calling the reduced buying power: “inflation.” With more than $50 trillion in debt-based money in the American economy, this banking system is a monumental Ponzi scheme

Periodically, the process reaches a mathematical limit where new loans cannot be originated fast enough to keep up with the demands for interest payment and the system crashes. The events are termed, “the normal business cycle.”

The “International Reserve Banking System,” consisting of privately owned central banks and commercial banking systems are so pernicious that they constitutes the most dangerous threat to human rights in the world today.
http://blog.american.com/?p=8645 Bank Business Models and the Crisis « The Enterprise Blog

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