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July 17, 2014

Alexander Hamilton was our first Secretary of the Treasury. Wall Street and its pernicious influence were not yet on the scene; there was no “tunnel” of which Prins writes. To be sure, there had been problems with Continental currency during the Revolution as well as our misadventure with the Articles of Confederation after that war before meetings of our forefathers from 1787 through 1791 brought us a Constitution of federated states and the first Ten Amendments. (I have always wondered that our Constitution which was ratified in 1789 needed ten amendments within only two years and that we have had only seventeen amendments in the 223 years since, but that discussion is beyond the scope of this post.)
Income to our government those days was largely derived from duties and tariffs; we had no income tax until 1913. Much of the controversy in Hamiltonian days was whether we should have a “national” bank system. There were many other questions of that day with the birth of our new nation that have long since been settled (or ignored) as our country progressed through the Industrial Revolution and Civil War on through the Gilded Age and wars, panics and a major depression. The Wall Street – Secretary of the Treasury revolving door routine as so well outlined by Prins was yet to begin as our country was just getting its act together as an expanding nation state.
Not all of our more recent Treasury Secretaries were from Wall Street. One such secretary, Andrew Mellon, a banker with oil interests from Pittsburgh, had a long record of service of eleven years under Republican presidents during the Roaring Twenties and the onset of the Great Depression (“bubble and disaster” years, respectively, and both brought on by Wall Street chicanery and Republican laissez faire policies of non-interference with “the market,” as though its “invisible hand” were a religious experience not to be tampered with by mere citizens).
Prins’s effort highlights the “tunnel” between Wall Street’s “Big Six banks” and the office of Secretary of the Treasury, with an occasional Tim Geithner (head of the New York Fed) thrown in. Geithner (who as New York Fed chief had jurisdiction over Wall Street), was promoted by Obama to Secretary of the Treasury after ignoring unsafe business practices by Wall Street bankers including but not limited to accounting tricks, falsified warranties on mortgage securities and weakened underwriting standards. The “tunnel” (or associated practice of appointment of Treasury Secretaries from “Wall Street insiders”) was and is bipartisan. The “advice and consent” presidents must seek from the Senate for such appointments to take effect becomes secondary to the process since the advice and consent of Wall Street must be first obtained in order for the formality of presidential “choice” to become known. No non-Wall Street players need apply.
Prins points out (as I have repeatedly written) that the repeal of the Glass-Steagall Act was a major contributor to the Great Recession as Wall Street banks became insolvent overnight and our economy verged on collapse. Banking practices that culminated in a world near economic depression would not have been possible if Glass-Steagall had been left intact. The practices that a Wall Street run amok engaged in (and that Glass-Steagall would have barred) combined with laissez-faire regulation are what brought us to the edge of catastrophe and the subsequent bailouts and the Fed’s purchase of shaky paper at par in order to (allegedly) save us from depression (while keeping the big banks afloat in the process). Was all that fear and bailout and buyout stampede fostered by Secretary Paulson justified?
We will never know what would have happened if the Fed (as “the lender of last resort”) had stepped in to keep the economy afloat while the insolvent big banks sorted out their futures in bankruptcy court. Routine banking and credit markets with money to lend from non-Big Six mid-sized banks that were not insolvent and fortified by Fed loans might well have been a better option than the one we took. One of the possibilities of what might have happened, I suggest, is nothing, and that chastened big banks which survived would do a better job of self-regulation in the future since no bailouts and paper buyouts were available. With our largesse, such banks have learned nothing, and neither have we, since such largesse is still available to these crap shooters. We need reenactment of Glass-Steagall in the worst way – now.
Prins agrees with me (ahem!) that the six banks should have been allowed to fail and sort out their futures in bankruptcy court. She quotes Teddy Roosevelt’s comment in 1905 that “This country has nothing to fear from the crooked man who fails. We put him in jail. It is the crooked man who succeeds who is a threat to this country.” He was and is right, and her quote is appropriate. The crooked men have succeeded. We have somehow allowed Wall Street to mislead and persuade us that finance is the source of our prosperity, and that when bad decisions threaten the banks, we must pay up or else.
With the repeal of Glass-Steagall under Clinton on the advice of his Treasury Secretary, Bob Rubin, a then traveler down the tunnel from a Wall Street bank CEO’s job (assisted by the further advice of libertarian Alan Greenspan, also a Wall Street graduate), regulations that would have guaranteed sound banks have evaporated, and while the Dodd-Frank Act is an attempt to bring back some of Glass-Steagall’s language, Prins thinks it is weak gruel which will damage the economy going forward.
Such a view from a trusted and erudite source as Prins convinces me, in view of Wall Street’s continuing wrongdoing, and since they know we will bail them out if they miscalculate with their crap shooting (or even commit criminal acts – see JP Morgan Chase’s admission of bribery to Chinese officials in naked contravention of the Foreign Corrupt Practices Act), that we must reinstate Glass-Steagall as the law of the land. If Dodd-Frank (whose adoption of regulations has been fiercely resisted by Wall Street lobbyists since its 2010 enactment) will not tame these global gamblers with your future and mine, i.e., we taxpayers who lie awake at night waiting for the next derivatives ax to fall, then it is my unalterable opinion that we have no choice but to reenact Glass-Steagall (or some modernized version of its essential parts). We are treading on thin economic ice every day its reenactment is stalled by the Big Six and their congressional proxies, whose interests are primarily in campaign contributions and reelection.
Prins notes that “America operates on the belief that if its biggest banks are strong, the nation will be too.” She then points out that the banks are only big, not strong. She is right; we saw how “strong” they were not that long ago. Our faith was misguided; strength and size were not and are not commensurate.
Aided by insights of Nomi Prins in her book, I will discuss in Part III and in more detail our failure to prosecute and regulate Wall Street banks, how we continue to subsidize their bottom lines and how we remain liable for their investment decisions (which we are responsible for but had and have no voice in making). Stay tuned. GERALD E


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