Why we need Glass-Steagall

"It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning." Henry Ford

Before a month ago I did not know what the Glass-Steagall Act of 1933 was. Through my friend Mark Butler, I have come to understand a bit.

This is the shortest summary I could find explaining what the Glass-Steagall act is and why we need it back. Start at 0:52 for the shortest explanation.

Glass-Steagall Act of 1933 explained by Max Keiser and William Black and Webster Tarpley
"a summary of the Glass-Steagall Act of 1933 taken from the movie Fall of the Republic http://www.falloftherepublic.com released on October 21st 2009"

This video documents who the people were who supported and passed the law that repealed Glass-Steagall.

Who repealed the Glass-Steagall Act? 
"The Glass Steagall Act President Roosevelt signed into law was repealed. See who swept aside the banking firewall protections on the 12th of November 1999"

My friend Mark Butler describes what fractional reserve banking is and why it is so dangerous to allow regular banks to do it.

First of all, there are two reserve ratios that are often confused. One is what percentage of deposits are not allowed to be embezzled. The other is how much capital (equity) is required for a given amount of loans. 

The "fractional reserve" in FRB refers to the former ratio, "capital reserves" refer to the latter. The Austrian school of economics generally holds that lending out deposits is a form of embezzlement that distorts the economy, among other serious problems. 

But it is perfectly legitimate for a bank to lend out money that investors lend to it, by purchasing bonds from the bank, for example. What the capital reserve says is that for every X dollars in loans a certain percentage must be backed by bank equity (i.e. the capital of the owner / stock holders), who take the first hit if anything goes wrong. 

Higher capital reserves mean the bank is less likely to fail, less risky, and less profitable in the short run. An increase in required capital reserves is called "deleveraging", and the short term effect is a decrease in the amount of money a bank can lend out _unless_ they raise more capital (i.e. by selling stock). 

Every bank however, tries to be as unstable as possible, because they are more profitable that way. That is why Lehman Brothers was leveraged thirty to one. That is all fine and good as long as they are willing to collapse and wipe out all stock holder equity, and a good percentage of the value of outstanding bonds whenever the wind shifts direction, without demanding a bailout and threatening dire consequences if they do not get one. 

So here with the Basel Accords, the idea is to standardize the required capital ratios across countries so that a bank in one country isn't radically more profitable than another country simply because they are allowed to run with a far smaller safety margin. 

Now personally, provided that we made embezzling deposits illegal, I don't think we need capital reserve requirements at all. If a bank wants to live on the edge, let them, as long as deposits are protected, and no one gets a handout. Tick tick tick boom every couple of decades or so.

From what I can tell, the repeal of Glass-Steagall is a major contributor to our Great Recession. Robert Kuttner said this on Oct 2, 2007.

A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

We must put the protections of Glass-Steagall back into place to prevent more busts like we have now and had in the 1929.

Against Political Extremes

http://www.washingtonpost.com/blogs/ezra-klein/post/the-republican-partys-mitt-romney-problem/2011/08/25/gIQAKRsGCN_blog.html

Wow! This is about the most plain speaking article I have read about the nomination race. I agree with its analysis.

"parties no longer compete to win elections by giving voters the policies voters want. Rather, as coalitions of intense policy demanders, they have their own agendas and aim to get voters to go along."
...
"political parties are basically groups of people with intense policy preferences who are trying to figure out how much they can get away with. But you can’t get away with anything if you don’t hold office. So the basic work of political parties is figuring out precisely how much of their agenda they need to sacrifice on the altar of electability"
...
“Voter inattentiveness creates the opportunity for intense minorities to pursue their narrow goals,” the authors write. “But it also creates uncertainty about just what it takes to win an election. Parties work hard to figure out ways to increase the chance that voters will respond positively to them, but basic uncertainty about how the inattentive majority will vote is a persistent feature of electoral politics.”
...
"With Romney, Republicans worry that they will cede too much to voter preferences."
...
"So the Republican Party is left with candidates who are too ideological to be elected and a front-runner who isn’t ideological enough to be trusted. Making matters worse, voters are likely to pay particularly close attention to this election. With an economy this bad, there’s no chance that they’ll tune out, as they did in 2000. Then, peace and prosperity lulled the electorate into complacency, and George W. Bush was able to present himself as not all that different from Al Gore. The Republican Party got away with quite a lot in ideology that year without sacrificing electability. This year, they can’t."

These points bring out exactly why I am so fired up about Romney. Both parties really are made up of a coalition of groups that really believe in their issues. If they could, they would pick their champion of their cause to become President.

This election in particular is unusual because of the economic trouble we are in. We have to nominate someone that will have broad appeal to independent voters because it is likely there will be more voters than usual. There is some response to what some feel like extremism of the tea party. There are also indications that a ham sandwich could beat Obama, so we should elect as "conservative" a candidate as we can.

I am against extremes in the issues I am not as passionate about. I am sure that goes for everyone. I really want to get our financial house in order. We cannot mortgage out future on our grandchildren's backs. To me, this is an overriding issue. So when I hear others get passionate about their issue, I often think, "Are you going to sacrifice us getting a Presidency on this point?"

They probably think the same way. The point is that many more people are going to be paying attention this cycle than normal. On both sides and in the middle. I see that as a good thing. I would that more people be involved that normally are. The sane middle.

I see Romney as a pragmatic conservative. Pragmatic because he recognizes what is doable and what is not. He does not waste his time pontificating on a issue he know he won't win politically. He was a governor of a very blue state and that has given him good experience.

I see him as conservative mostly in the area I care about most, finance. He knows how to save troubled companies. He knows sound budgeting principles.

How conservative he is in other areas I am not as sure. To be honest I don't care as much. Maybe I see the reality that only so much change can happen at once. That being true, I would rather spend our political capital getting our spending and taxing right. Save the other political battles for another day.

Repealing ObamaCare with Congressman Paul Ryan

This is a great interview of Paul Ryan by Peter Robinson of Uncommon Knowledge on Oct 3, 2011


Some quotes and notes.

Paul Ryan "Either we give the country a choice of two futures or we just go down the path we are on. I feel we have a moral obligation. Whether this is going to work politically or not, it doesn’t really matter. All I want to know is that… I did everything I can to stop this country from going off a cliff."

He talks about the difference a defined contribution plan would have rather than the defined benefit plan we currently have.

Peter Robinson "So your hope is generational, for seven decades, Americans have been taught to rely on Federal Government, first for old age pensions, then for health now for food stamps.  Your hope is that by changing these programs, not eliminating them, not living up to Milton Friedman's ideal of wiping out seven decades of legislation.  But by changing them you can begin instucting new generations in individual liberty" (Start time 34:53)

In answer to how do you keep getting elected in a democratic district, Paul Ryan said:

I don't say anything different at home than what I am saying to you right here. This is exactly who I am. That's the key.  Don't try to be somebody you're not.  You know if you don't get elected, you don't get elected.  No big deal.  If you want to be good at this job you have to be willing to lose the job.   

I was at a stop and go gassing up the other day...  I had a guy come up to me and said, "You know what, I don't always agree with everything you do, but I can tell you're trying and you're sincere and that's what matters to me" 

What I believe is that people want conviction in politicians.  They want people who are not just giving them vague platitudes.  They want somebody trying to tackle these problems.  People just know in their guts that we are going off the rails.  This country is in deep trouble. ... They want people who are standing up and doing something about it. (Start time 36:34)

How the election needs to be. "We have to win an affirming election where the country give us the authority and the obligation to do this.  If we don't, if we go into this election with just a personality contest, muddling the differences, just beating each other up, then its going to be ugly afterwards, no matter who wins."

Harmony in Politics

As I was going to sleep to some classical music, my mind went to a statement Newt Gingrich made in the debates last night, "I'm Not Interested In Your Effort To Get Republicans Fighting Each Other".  There were images of the Republican candidates very different voices yet they were in harmony.  United in their desire to get those who want to work back to work.  To have the idle capital invested.  Like the manure Dolly Levi (see comment below) would call it, spread the capital out to all its investments to grow new things.

I sure hope that we can stick together with those that agree with us 80% of the time.  That we focus on what will bring the greatest good and not divide ourselves needlessly.

Natural Law

In a Facebook group I belong to, someone became frustrated at the desire of some to legislate morality.  With all the back and forth, I became frustrated at how we rip each other to shreds when we agree with each other 80% of the time.

As I thought about what common ground I could find, I thought of Natural Law.  I asked the group.

Do you all believe in natural law? A natural law is authoritative over all human beings. To reject it is to be evil.
Here is the shortest summary I could find about it. It details the other fundamentals of natural law.  Here is a video that describes it well.

The question, "What is natural law?" kept coming to my mind.  I like the way James A. Donald said it.

Natural law is a method, not a code. One does not reason from words but from facts. The nearest thing to a written code of natural law is the vast body of natural law precedent. But a precedent only applies to similar cases, and is thus rooted in the particular time and circumstances of the particular case, whereas natural law is universal, applying to all free men at all times and all places.

I also like how he disconnects it from questions about God.

“Ius Naturale” is the law applicable to men in a state of nature. It precedes religions and kings both in time and in authority. “Ius Naturale” does not derive directly from the will of God. As Hugo Grotius pointed out in the early seventeenth century, even if there was no God, or if God was unreasonable or evil, natural law would still have moral force, and men would still spontaneously back it with physical force.

For the purpose of government and public policy, I think that it is better to describe the higher authority we appeal to as Natural Law rather than God.  There is no need to polarize people who do not believe in God from those that do not.

Public Virtue

It seems that most of my political discussions at work end on "people are selfish and there is no solution".  That there will always be those leeching off those who produce.  There will always be those who hoard the results of good fortune and hard work.  

There is a solution.  It is to revive public virtue.  In the early days of our country there was debate whether a representative government could survive.  Whether the people we good enough collectively to run themselves responsibly.  In Mormon terms I would call this, "try the virtue of the word of God".

And now, as the preaching of the word had a great tendency to lead the people to do that which was just—yea, it had had more powerful effect upon the minds of the people than the sword, or anything else, which had happened unto them—therefore Alma thought it was expedient that they should try the virtue of the word of God. Alma 31:5

In general conference, Lynn Robbins explained this principle in contrasting the difference between being or becoming and merely doing.

Alma discovered this same principle, that “the preaching of the word had a great tendency to lead the people to do that which was just—yea, it had had more powerful effect upon the minds of the people than the sword” (Alma 31:5; emphasis added). Why? Because the sword focused only on punishing behavior—or do—while preaching the word changed people’s very nature—who they were or could become.

One group in the Book of Mormon hunted the most evil part of their community.  They also preached the word of God to them.  They were successful. The pilgrims came to the New World.  Pioneers went west.  They left to build a virtuous society.  We have no immediate land to escape to.  We are all we've got.   

I believe that there still is virtue in the public generally.  We are children of God.  As we teach and encourage that spark of light in each of us, hearts will change.  

Public virtue is the collection of every private virtue.  Build up where I have influence.  Start where I have the most effect, myself.  Then to my family and friends and then community and country.  As we inspire the godly in each other, solutions will grow.

The Deficit Problem: Too Big To Solve, Too Important To Fail

That the title of this Institutional Investor article. (found from Clark Judge)

It’s probably still well within the means of the United States to bring its soaring public debt under control and steer itself back to the path of fiscal stability. That solution, however, would require a massive public effort and shared sacrifice, the sort that philosopher William James might have called the “moral equivalent of war.” 

It also would require the once-or-twice in a century level of leadership that has steered the country through major crises in the past. 

The financial markets muted reaction to President Obama’s deficit reduction speech on Wednesday suggests such leadership is yet to emerge. 

Brazil, Russia, India and South Africa are moving to stop using US currency when issuing grants and credits to each other.

Standard & Poor said "there's a 1-in-3 chance that it could downgrade the U.S. top credit rating within two years. Markets were down sharply on the news"

We have to get our budget in order.  Time is running out.

Rand Paul Responds to Obama on Libya

Senator Rand Paul responds to the explanation of Barack Obama on why we are bombing Libya. I heard it from a Facebook post from Young Americans for Liberty.  Here are the quotes that moved me to post

We are already in two wars that we are not paying for.  We are waging war across the middle east on a credit card; one who's limit is rapidly approaching.
...
What if helping Libya's interest hurts American interests? What if we are sending our military to where we might actually be helping the same terrorists we fight in other countries?

Bold Yet Modest Budget Reform

I learned about this editorial of Scott Walker from Hugh Hewitt.  I like what Hugh says, "It would be interesting to hear Harry Reid answer the question why he thinks what has happened to Greece and Ireland and is now happening to Spain cannot happen to the U.S."

The Choice of Two Futures

Here 1 is a slide show from Paul Ryan. He shows why it is so important to balance our budget.

Learning to Read

Here are a few videos and other resources to learn to read.

Between the Lions



The 1970s Electric Company

"The free exercise of religion is the paramount civil liberty"

On Friday, Dallin H. Oaks gave a speech at Chapman University School of Law.  Later Hugh Hewitt interviewed him.  I have listened to the interview and found several things of note.

Well, the free exercise of religion is the paramount civil liberty in terms of priority and placement in the United States Constitution. And religion has always been in a sanctuary in the sense that it had a pedestal higher than other legal rights. And in Employment Division V. Smith, the United States Supreme Court dragged religion out of the sanctuary, and said you’re in effect, you don’t have any more free speech rights than people generally. You don’t have the right to override state laws any more than any other person does. And it just deemphasized religion very significantly.

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The founders said that that Constitution presupposed a moral and religious people, and it would be inadequate to the government of any other.

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HH: ... you quote Adams. And very early in this speech, John Adams wrote, “We have no government armed with power capable of contending with human passions unbridled by morality and religion. Avarice, ambition, revenge or gallantry would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution was made only for our moral and religious people. It is wholly inadequate to the government than any other.” Then you go on to say, and I’m quoting you now, Elder Oaks, “I submit that religious values and political realities are so interlinked in the origin and perpetuation of this nation that we cannot lose the influence of religion in our public life without seriously jeopardizing our freedom.” Do you believe for a moment that elite opinion makers will even take that argument seriously?

DO: No, I don’t believe elite opinion makers will take that argument seriously, but I’m trying to speak over their elevated heads to the people of the United States. And I think there are a lot of great people out there who’ll take that seriously. And some of them are affiliated Protestants, some Catholics, some Mormons, some Muslims, and a lot of people that aren’t affiliates with any religion, but believe down in their hearts that there’s such a thing as right and wrong, and they’re going to take it seriously.

I think that there is a broad consensus among very many that religious freedom and practice increases our freedoms. I have heard the word avarice before but have never gotten a good hold of what it means.  Dictionary.com says it it "Extreme greed for wealth or material gain."

There is so much more in the interview.  I have not yet listened to his address to the law school.  I am including a shorter video of a question and answer session on the topic of religious freedom.  Here is a transcription.



This caught my attention,

Another thing that concerns me about the diminished influence of religion in our society is the increasing volume of voices that say that religion has no place in the public square. In other words, in the halls of legislative chambers, in the courtrooms, in public debates, a religious opinion, or the advocacy of a religious leader, has no place. It’s somehow a violation of the separation of church and state. By the way, separation of church and state is a concept that has gotten up outside the four corners of the Constitution. The Constitution said there will be no establishment of religion, meaning no official state religion. It does not say that church and state should be separated by a wall impregnable, to use a term used in a United States Supreme Court decision some years ago. [emphasis is mine]

And an important distinction between the freedom of worship and freedom of religion.

 I think we’re seeing erosion when some public figures, for instance, refer to freedom of worship rather than freedom of religion. Now let’s look at that for a moment. Freedom of worship is a far narrower concept than freedom of religion because freedom of religion includes the freedom to act upon one’s religious beliefs, whereas freedom of worship tends to indicate that religion is confined within the church or synagogue, if you choose to go there.

You can find the transcription and free audio for the interview here .  The newroom at lds.org noted his talk to the school and provides a video and transcription of it.  I have converted the video to mp3.

What Happened to 15 Million US Jobs?

A friend sent me this article from NationalJournal.com. It opens with this sub title "Taming unemployment starts with solving the mystery of the jobs that were supposed to have been created in the past 10 years but weren’t."

I read quickly looking for why these new jobs were not created.  The answer was we do not know, "Before we can fix our jobs machine, we must figure out what broke it. As several economists noted, anyone who says they’ve solved the problem is lying."  Well count me in for finding out why.

Following are a couple quotes trying to find out why

Perhaps, some economists theorize, the United States isn’t creating innovative jobs because its workforce isn’t up to the challenge. For probably the first time in history, our young adults are no better educated than their parents. Nearly all our international rivals, in developed and developing economies alike, continue to make generational leaps in college graduation. Brainpower is still our comparative advantage with the rest of the world, but the advantage is shrinking.

“It is the best educated and those with the highest skills that derive the most benefits from a globalizing economy,” says Jacob Funk Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics who studies global labor markets. “As the U.S. workforce becomes relatively less skill-intensive vis-à-vis the entire world, the broader benefits of the global economy, both in terms of job creation (and national well-being), are going to decline.”

A second quote:

Some free-market economists say that we could encourage more domestic investment by cutting corporate tax rates, although it’s fair to note that the jobs breakdown of the 2000s coincided with hefty tax cuts under President Bush. Still, liberal and free-market analysts alike have argued for a sweeping reform of America’s corporate tax code—one that would reduce rates while eliminating many deductions and provisions that give companies incentives to spend their global profits outside the United States. More narrowly, groups such as the Association for Financial Professionals have urged Congress to lower America’s tax rates on repatriated income, to levels closer to international competitors.

I am  not sure why this is happening.  It does fit in with my general malaise feeling I have had for quite a few years about the US economy.  In particular, I look at the society I live in and what they produce or the services they provide.  Are the things they are employed at something of intrinsic value or have we been riding a wave produced by giants before us?

I think of the space program, the marvels in manufacturing, in communication.   What is my generation, what am I doing to contribute to the real value of the goods and services I am providing?

Perhaps the advances in manufacturing, transportation and communication is leveling the playing field of the earth.  Those in much poorer places are much more hungry to work hard and get educated.  Perhaps the leveling is allowing them access to opportunities to gain the necessities and even niceties of life.

I will continue to watch this and recommend my children and anyone else to not be satisfied just because they are at the top of their class.  There may be a much bigger pool of of employees and entrepreneurs to compete with.  I am confident that as we all (the whole globe) work hard and work smart there is an abundance of livelihoods that will be earned.

Will the laws of God will be suspended?

I just read Dependence Day By Mark Steyn from a link from Hugh Hewitt.  The first thing that caught my attention is what we said about our debt.

Within a decade, the United States will be spending more of the federal budget on its interest payments than on its military.

According to the cbo’s 2010 long-term budget outlook, by 2020 the U.S. government will be paying between 15 and 20 percent of its revenues in debt interest—whereas defense spending will be down to between 14 and 16 percent. America will be spending more on debt interest than China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel spend on their militaries combined. The superpower will have advanced from a nation of aircraft carriers to a nation of debt carriers.

The tone of the article does not get better after this.

One-fifth of British children are raised in homes in which no adult works. Just under 900,000 people have been off sick for over a decade, claiming “sick benefits,” week in, week out, for ten years and counting. “Indolence,” as Machiavelli understood, is the greatest enemy of a free society, but rarely has any state embraced this oldest temptation as literally as Britain.

He concludes with a dire prediction.

Without serious course correction, we will see the end of the Anglo-American era, and the eclipse of the powers that built the modern world. Even as America’s spendaholic government outspends not only America’s ability to pay for itself but, by some measures, the world’s; even as it follows Britain into the dank pit of transgenerational dependency, a failed education system, and unsustainable entitlements; even as it makes less and less and mortgages its future to its rivals for cheap Chinese trinkets, most Americans assume that simply because they’re American they will be insulated from the consequences.

...

Do you think the laws of God will be suspended in favor of America because you were born in it? Great convulsions lie ahead, and at the end of it we may be in a post-Anglosphere world.

This article brought to mind something I read a month ago, Top Test Scores From Shanghai Stun Educators

“Fifty years later, our generation’s Sputnik moment is back,” Mr. Obama said. With billions of people in India and China “suddenly plugged into the world economy,” he said, nations with the most educated workers will prevail. “As it stands right now,” he said, “America is in danger of falling behind.”

If Shanghai is a showcase of Chinese educational progress, America’s showcase would be Massachusetts, which has routinely scored higher than all other states on America’s main federal math test in recent years.

But in a 2007 study that correlated the results of that test with the results of an international math exam, Massachusetts students scored behind Singapore, Hong Kong, South Korea, Taiwan, and Japan. Shanghai did not participate in the test.

We are being surpassed by countries with the will and work ethic to succeed in math and science.  Is it so important that America be the best at everything? No. What concerns me is that we are selling ourselves into slavery.  What I want is a world of independent, hard working, free people.  Free to pursue happiness unchained by debt.  Free to achieve great heights, free to help those in less fortunate circumstances to rise up and become self sufficient.  What we need is a revolution in commitment and work.

When We Left Earth

My wife and I just finished When We Left Earth: The NASA Missions on Netflix.  What a history lesson! It was inspiring.  I haven't paid that much attention to what we have planned for future manned spaceflight.  It looks like we changed our direction recently.

http://en.wikipedia.org/wiki/Space_Shuttle_program#Retirement

http://en.wikipedia.org/wiki/Project_Constellation
http://en.wikipedia.org/wiki/Project_Constellation#Debates_about_program

http://www.bbc.co.uk/news/science-environment-11518049

Here is a link to the Netflix page for the shows.  You will have to be logged in for it to work