Friday, March 6, 2009

Volcker has an idea from 1933

Today at NYU Stern School of Business Paul Volcker gave a conference that indicated some one is actually thinking about how to fix the bank problem. Up until today the Bad Bank theory has been the talked about solution. However the “Bad Bank” solution is not a solution at all. The Bad Bank idea was designed to ‘clean’ the balance sheets by transferring the toxic debt to a separate entity, a bad bank. Once the toxic debt is off the balance sheet, the theory is that the banks can get back to lending. The “Bad Bank’ idea is a feasible solution for the near term crisis.

But what about the long term?

Paul Volcker says that commercial banks and investment banks should be separated. Under this idea the commercial banks would be focused on providing depository services and access to credit to consumers. The investment banks can then operate with more risk due to the indirect impact of their actions on the commercial bank customer.

Ever heard of the Glass-Steagall Act?
One of the major fixes of the financial system after the great depression was the Glass-Steagall Act. In 1933 this legislation was introduced to give more power to the FED, while also separating the banks by type of business (commercial & investment).

So what happened?
In 1999 Phil Gramm (R- Texas) and Jim Leach (R- Iowa) drafted legislation that effectively repealed the Glass Steagall Act. This bill was passed on party-line votes in the house and senate, and eventually signed into law by Bill Clinton.

So, it looks as if the Big O and the gang are going to end up with legislation that will eventually put us back to what fixed the first Depression, the separation of banks.

The Republicans screwed the pooch on this one!

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