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This video documents who the people were who supported and passed the law that repealed Glass-Steagall.

Who repealed the Glass-Steagall Act? 
"The Glass Steagall Act President Roosevelt signed into law was repealed.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.