William Black is an associate professor of economics and law at UMKC. He has held many prestigious positions, including executive director for Fraud Prevention. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management. He is a criminologist and former financial regulator. Here is a direct video link.
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The National Federation of Independent Business, Small business optimism Index dropped 2.7 to 91.4 in February: “a reading that historically has been associated with recessions and periods of sub-par growth”. See full NFIB report and graphs here.
Contrary to the perpetual risk-selling optimism of Wall Street, the NFIB’s conclusion offers sobering insight into small business–the engine of the real economy–and growth prospects over at least the next 6 months:
“Large firms are loaded with cash but unwilling to spend. For small firms, record low numbers reporting the current period as a good time to expand, for 5 years and running. More firms reducing inventory than adding to it, even in a growing economy. More firms are expecting a deterioration in the economy than an improvement. In NFIB’s Problems and Priorities survey, uncertainty about the economy and government policy both rank in the top 5 most severe problems facing small business owners. You don’t bet your money on a future you cannot see clearly.
The Federal Reserve now holds more government bonds than either Japan or China and remains the major buyer of mortgage securities. In the “olden days” banks made mortgages, lending out depositors money to credit worthy home buyers. Now the regulatory cost of making mortgages is so large that only a few big banks will do it. Regulators no longer allow banks to lend for 30 years and finance with short-term deposits. This risk is dumped onto the taxpayer.
The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. Even the Fed’s guidance is for a weak economy, that’s what owners read and they are the experts (and policy makers). All policy is focused on the election, pandering to special interests, not the interests of the “middle class” (most of us) which simply wants to see better economic growth and serious job creation (along with improving compensation). Consumer sentiment is equally morose for this stage of a “recovery”. Only 1 in 10 consumers think government policy is good. The IRS is still taking the 5th and the DOJ investigator sends campaign money to the Democrat party. None of the “issues”are resolved; those involved hoping to stall long enough for other crises to shove them off the front pages-maybe Putin will save them. But the stock market is hitting new highs (as is the debt supporting stock purchases) guess we should all cheer.”
A return to Glass Steagall-like divisions between traditional deposit based banking and the investment sales machine is critical to economic and social recovery. This obvious point has been made repeatedly by wise and enlightened voices over the past 6 years. Last month Thomas M. Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation and former President of the Federal Reserve Bank of Kansas City, presented to the National Association for Business Economics 30th Annual Economic Policy Conference and called for lawmakers to do the right thing and restore the rule of law on the investment banking sector. His actionable conclusions were laid out as follows:
First, simplify the corporate structure of the mega banks that now dominate the financial system. There is mounting evidence of the benefits that would flow from such an action. Market analysts and economists3 have pointed to increased value and greater economic stability that would flow from such restructuring. Commercial banking is different than broker-dealer activities, and studies show that requiring banks and broker-dealers to operate independently would serve potentially to improve the pricing and allocation of capital, and to increase value.
Second, as the Federal Reserve recently required for foreign banks operating in the United States, governments should require global banking companies to establish separate operating subsidiaries within each country. This subsidarization would give greater clarity to where capital is lodged globally, and it would serve to assure that banks within each country have capital available at foreign affiliates to absorb losses on a basis comparable to that jurisdiction’s domestic banks. Subsidarization also would lead to greater recognition of the risks on firms’ balance sheets, causing more capital to be held globally and thus contributing to greater overall financial stability and availability of credit.
Those who object to this concept suggest that such a requirement interferes with capital flows and would actually reduce available credit. However, subsidarization would require that capital be aligned with where assets reside, and it would identify for markets and authorities the capital available to absorb losses should it be needed. It provides far more transparency than the current structure. Such transparency would encourage a more responsible use and allocation of capital and resources. It ends the charade that markets are open and safe, only to see them suddenly shut down and ring fenced, with devastating effect, when the inevitable crisis occurs.
It is fundamental to capitalism that markets be allowed to clear in an open, fair manner and that all participants play by the same rules. A situation whereby oligopolies that evolve into institutions that are too big to fail, and are so significant and complex that should they fail the economy fails, is not market economics. To ignore these circumstances is to invite crisis. See the text of the whole important speech here.
Already ten states have introduced resolutions urging Congress to reinstate the banking separation measures of 1930’s Glass-Steagall Act. Those states are Alabama, Arizona, Kentucky, Maryland, Minnesota, New Mexico, Rhode Island, Virginia, Washington State and West Virginia. In Maryland and Rhode Island, there are matching resolutions in both the House and Senate.
In 2013 there are was total of 26 states with resolutions: Alabama, California, Colorado, Delaware, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Dakota, Virginia, Washington and West Virginia. See all the details and track developments here.
This is not complicated, it does not require thousands of pages of legislation. The original Glass Steagall Act was just 37 pages long and its text can be read here. The reason proposals to date have been so convoluted, complex and ineffective is because so far the politicians have continued to bow to the banking cartel and their insistence that they must remain in their present lawless, incestuous, taxpayer funded, conflicted forms. The broad public in all democratic countries must insist these simple but urgent changes on their political representatives now. Delay is continuing to compound costs the free world simply cannot afford.
This video, created by homeschool students Taylor Parker, David Bingham, and Cliff White, won 2nd place in the High School West Region in the 2014 StudentCam contest sponsored by C-Span. The title of the competition was “A Message to Congress – What’s the Most Important Issue Congress Should Consider in 2014?” For more info go to: www.studentcam.org. Here is a direct video link.
