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A REVISIT OF RECENT HISTORY IN RE INVESTMENT PRACTICES

August 18, 2017

A REVISIT OF RECENT HISTORY IN RE INVESTMENT PRACTICES

At the Bretton Woods Conference in 1944 in New Hampshire when the Allies had a meeting to determine WW II postwar policies for the world’s economies, my favorite all time economist, John Maynard Keynes (who represented Britain), warned against unregulated domestic and international finance. It appears that his warning has gone unheeded since, and especially since Bill Clinton signed a repeal of the Glass Steagall Act of 1933, one of FDR’s New Deal attempts to rein in the disastrous investment practices by the big Wall Street banks which gave us The Great Depression. Glass-Steagall separated commercial banking from investment banking; its repeal put them back together again.

The big banks took the ball and ran with it. Freshly minted MBAs from Harvard and Wharton fighting to make partner and bigger bonuses in such banks as Goldman Sachs and JP Morgan Chase came up with new and esoteric instruments, securitizing anything that wiggled, instruments such as collateralized debt obligations (CDOs), credit derivatives and the like. Worthless to subpar mortgages were packaged and sold to teachers, firemen, police and nurses’ retirement funds, as though they were real collateral backed 100 percent by the value of the property represented by the paper sold.

I need not go through what happened as a result of removing the protections of Glass-Steagall and its regulatory effect on the investment practices of the big banks. We all know that Bush’s Great Recession came about because of the reckless investment practices of the big banks unleashed by the repeal of Glass-Steagall. We know of a world of then near international depression, the bailouts of our insolvent banks and other such ancillary economic disasters (millions of bankruptcies, plunging demand, a Dow gone south, high unemployment etc.). We paid a heavy price for our “let the market decide” policy rather than regulate the market for the good of all those affected and stability of the market itself.

So what did we do about it after the mortgage foreclosures put millions of unemployed Americans out of their homes and into the sidewalks and under the bridges, mortgages that never should have been made but for the greed of the big banks who knew or should have known that such mortgages were subpar but who made handsome commissions and fees from approving and financing such transactions, and then having the colossal chutzpah to securitize bundles of such lousy mortgages and selling them for further commissions and fees to unsuspecting retirement funds as above noted?

What did we do about it? We bailed them out, the Fed bought a lot of their subpar paper at par; we even bailed out their vendors, insurers and shareholders, and, oh, mortgage fraud? Yes, we made them pay a chump change fine but no banking executives went to jail. The AG said that the banks were “too big to fail” and he feared an international depression if we were too tough on such bankers.

The AG missed the point – wrong verb – the banks had already failed. We resurrected them. That’s not capitalism, Darwinian or otherwise; that’s corporate socialism, and is found in many other areas of public largesse such as grossly unwarranted tax cuts, redefinition of ordinary income into “carried interest” and capital gains and other sleight of hand redefinitions constituting yet other giveaways to the rich and corporate class which substantially reduces their tax liability, thereby increasing the relative liability of the rest of us to pay for costs of governing.

This is the same class (a class that diverts our attention from the billions annually our politicians lavish in corporate welfare on their bottom lines) that pays millions for propaganda tirades against individual welfare such as food stamps, rental assistance and the like, calling such programs “socialistic.” Worse, the costs of such propaganda by this favored class are deductible, thus increasing the relative tax liability of the rest of us as we pay for our own brainwashing.

Back to our failure to regulate the investment practices of big banks – When ordinary corporations fail or can’t otherwise make it throughDIC-insured  a Chapter 11 process, their shareholders take the hit and frequently vulture corporations such as the one in which Romney was a member take over such failed corporations out of bankruptcy and either revive them or, alternatively, sell their parts off to other going corporations. Cannibalizing dead corporations is good business, especially if the cannibalizing corporations can buy the assets of such dead or dying corporations for a song, which they usually do, and though I find the idea of cannibalizing repugnant, I must concede that its practice is a capitalistic one and not one found in corporate socialism. Someone has to clean up the mess and assist the court in disposing of the remains and paying creditors perhaps pennies on the dollar for corporate failures, and good capitalists will find a way to make a profit out of someone else’s disaster. Capitalism – a brutal system – unless you are a banker or a vulture or both, as is sometimes the case.

So how have our politicians reacted with this near brush with another Great Depression? Democrats passed the Dodd-Frank Act of 2010 which, among other things, removed FDIC-insured funds from the clutches of the big banks in their investments. Republicans thereafter removed this impediment via an amendment to the Act deviously attached to a spending bill so that the big banks once again have our money available for their investments around the world, investments that are under-regulated as armies of big bank lobbyists and lawyers constantly descend upon the appropriate committees in Congress in their attempts to dismantle Dodd-Frank on behalf of their already coddled clients. Wall Street bankers have spent more than one billion dollars in lobbying and legal costs in their attempt to repeal Dodd-Frank or remove its regulatory teeth, or both.

One would think that we should have learned our lesson with the dismantling of Glass-Steagall in 1999 and would wish to strengthen Dodd-Frank in order to prevent another brush with catastrophe, but not so. The big banks are back to their old tricks (some of which is with our FDIC-insured money) in chasing investment deals around the globe with evermore esoteric instruments, and we are again at risk for international depression or recession. Will we never learn, or does greed and avarice stamp out reason and experience in investment policymaking, ostensibly for the common good?

You be the judge. I have made my judgment, and it is this: Elect people who among other stability- inducing promises pledge to make corporate America share the tax load fairly and regulate banking investment practices to not only the benefit of the rest of us but, ultimately, to the benefit of such banks themselves.      GERALD        E

 

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