The Gilded Lily
One micron is about ten gold leaves thick. The gilded age, one. Since, and yet, there are those who would return the nation to that time. To their minds, it was the best of times; that all that need be done was rid the nation of the odious Progressive and New Deal Era laws that in fact had had nothing to do with the age’s demise, and the labor unions that formed up during the period; then let the laws of capitalism and of free markets take their course. For these some, and seems quite a few more of us, in times of change, when the future is unclear, it is, “backward ho!” After the 1960s, came the 1970s. By the 1970s, the times were really changing.
One way to figure out what was happening in the 1970s was to not even try; was to just pretend that it wasn’t the beginning of something new, that nothing had really changed. But, rather that it was that the gods were angry with us, were telling us to reform our regulatory ways.
Neither capitalism nor markets needed regulation. So sayeth Ayn Rand, and Milton Friedman. No matter that Ayn Rand wasn’t an economist, nor a philosopher. That she wasn’t even really Ayn Rand. The Fountainhead and Atlas Shrugged were fiction. All the better for those who loved a good myth; were too old to believe in Santa or play Cowboys and Indians; and, yet, were too young to be able to think very well. These were narratives for high school boys, professional athletes, uber nerds; for any and all the would be libertarians. Recall: It was the narrative that won the west. They who control the narrative control the world. Ayn was the Zane Grey of her time; Milton Friedman, of his. All that remained was to find someone to play John Wayne, and a horse. Alisa Zinovyevna Rosenbaum left Russia in 1926 for America; to write plays and to learn how to make movies.
“Money knows best.” Is the one true measure. “There needs to be a cost-benefit analysis.” If there is no direct net economic (monetary) benefit, then the regulation must go. Ayn was right. Upton and FDR were wrong. No metric for social; so it doesn’t count. Defense somehow does. So it began.* The regulatory agencies themselves, even the courts bought in. Or, was it that they were bought? And, there must be less reporting requirements! All the paperwork is jamming up the gears. Finally, once and for all, they would begin ridding the nation of the disastrous Progressive and New Deal Era regulations, social programs, and unions.
*There had been an earlier, first attempt, the Administrative Procedures Act of 1946, was intended to define the limits of regulatory authority so that they were not in conflict with the authority accorded to the legislature by the constitution. After lengthy deliberation and negotiation, the Act turned out pretty well.
Always trust your indication; else, another Three Mile Island, or Chernobyl. The Home State Savings Bank failure in 1985 was a wake-up. Silverado Savings and Loan, 1988; Lincoln Savings and Loan, 1989; and Midwest Federal Savings & Loan, 1990; wouldn’t have happened if they had. Were proof positive the dogma was wrong. Yet! Who are you going to believe? The indication couldn’t be right.
Still and yet, it was full speed astern, “backward ho!” Out with Glass Steagall! In with cost-benefit analysis! The dollar over all! Bankers know best! With the likes of the Honorable Republican, nee Dixiecrat, then-Senator, Phil Gramm at the helm, what could possibly go wrong? In no particular order — Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, and all the recent recall attempts. These were some of the effects. What were the causes?
First, we need to know what was going on in 1970. At the time, the nation was either clueless, in denial, or both. Has been ever since. Insisted, rationalized, hoped, that we could somehow undergo great economic dishevel without changing. That we could shift from a production of goods, manufacturing based economy to a finance (sometimes mistakenly called global and/or service) based one without missing a beat.
The shifting to a finance based economy was premised. We would be following the United Kingdom’s example much as we had in instigating the 1898 Spanish-American War. Then, we were going to develop the colonial economic model. This time, we, as Britain had, would throw off industrial production and go financial. Took care of the American capitalist’s labor problem. Five for the price of one in Mexico, ten in Asia. Provided a good time, a good excuse, to deregulate. Ours was to be an “ownership society,” the man said.
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Deregulation was the hole through which ENRON drove a truck bomb. A hole opened by the broadly successful deregulation of the airline industry in 1978. By lobbying extensively, spending $Millions, in state after state; ENRON ‘unleashed the power of the market’ for energy. More accurately, ENRON planned to control the energy market; to make $Billions off its political investment. November 2001, that truck exploded. Afterward, there was no more ENRON. The big hole in the ground was a lot of bankrupt investors, utilities, cities, and states.
Before the blast, with the most gracious help of the Mrs. Phil Gramm, ENRON forced Northern California’s once great PG&E into bankruptcy. Left the customers holding the bag. Quickly circled in the hedge-funds and the Wall Street Bankers. Too soon, followed the 2010 San Bruno gas explosion. The explosion wasn’t an accident; it was negligence in the name of cost cutting in the name of maximizing shareholder/investor return. What else mattered? Money always knows best. Instead of spending on needed maintenance, the New PG&E had lavished money on Commissioners, deregulation, investors, and shareholders. In 2019, all hell broke loose in a fire in Santa Rosa. The high temps, high winds, dry grasses, and dead trees tinderbox conditions were due to Global Warming. PG&E furnished the match. Got the bill because of improper and inadequate maintenance due to cost cutting measures meant to maximize shareholder/investor returns. Neither Harvard, Wharton, nor MIT have figured it out to this day. What’s to know? Things are booming in Texas.
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Seems Boeing Aircraft had succeeded in spite of its engineers thinking that they should have a say and union members demanding a say in production practices. Just think what Boeing could do without them. Besides, finance types never liked unionized engineers or workers. Engineering was too hard to quantify. Unions skewed the market. We’ll offshore fabbing the fuselages to China, and go south for assembly. South Carolina, where they show management proper respect. As for regulation? Best if done in-house; more cost effective. Management up from an in-house farm system must go. Out of touch with the times. Any recent Harvard MBA could do a better job. What would Jack Welch do? Next, a financial corporation based in Chicago. Watch us go. Put those huge engines out in front of the wing on the 737 of 50 year old design, jigger a center of gravity fix without telling anyone, we’ll save tons on re-engineering, and make a killing. Did, too. The 737 MAX was the culmination of Boeing becoming a financial services company in the new finance based, union-busting, and deregulation/(regulation capture) economy. Boeing’s becoming an important financial services company was a consequence of its merger with/(acquisition of) McDonnell Douglas in 1997. The Gramm-Leach-Bliley Act repealed part of the 1933 Glass-Steagall Act making financial services more attractive than aircraft manufacture. Gramm was on a roll. So was the changing of our economy into one more financially based.
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Boeing got a lot of its management ideas from ‘Neutron Jack’ at General Electric (GE); ‘Neutron Jack’ being the nickname for Jack Welch who ran GE from 1980 until 2000. Some of Boeing’s management team during the fall from greatness trained under Welch; had brought the thirst for financial focus with them. Boeing wasn’t alone. For twenty years, Welch was a dominant figure in American industry and finance; in the world’s. Showed them how to get it done. Seems chickens do come home to roost. Falling from the DJIA had to hurt.
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Sears and J. C. Penney extend back to the gilded age. Both were built from the ground up to meet the consumers’ needs. Which they did quite well for generations. Their stuff wasn’t fancy but it was always ‘worth the money’. Working people across America depended on them, swore by them. They were even good places to work; to retire from. Fostered employee/employer allegiance.
What a dumb way to run a business. Seems, they also hadn’t heard about maximizing margins and shareholder/investor returns; of planned obsolescence. Why sell the customer a pair of pants that would last a year when you can sell them three pair that might? Results — Poof! Seems a finance based economy wasn’t good for Sears, J. C. Penney, or for working people after all. Also seems, that the pursuit of cheap manufacturing can be hazardous to a company’s health. No survivors found at the scene; just the skeletons. Some of the old Sears and Penney stores have been taken over for warehouse/distribution centers by Amazon.
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There is a story behind the Hospital Emergency Room scandals. Better yet, a name. Stephen A. Schwarzman was one of the many $Billionaires spawned by the financialization of the US economy. A man with a nose for making money with money. His own, others’, and the U.S. Government’s. In 2016 Schwarzman’s Blackstone Group bought TeamHealth. TeamHealth is responsible for the egregious out-of-network billings from Emergency Rooms, and the slave labor wages for the Doctors who work in them. Stephen A. Schwarzman is a long-time friend of TFG.
Before TeamHealth, Schwarzman made a fortune in the financialization of housing by buying up houses, throwing on a coat of paint. then renting them out to those who can no longer afford them because of the astronomical prices resulting from the financialization. Results — record homelessness. Because of the financialization of housing; we have people with jobs who are homeless; kids in our schools who are homeless; and several more $Billionaires.
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The forensics on the 2007-2008 financial crisis are ongoing. To date, the list of causes is longer than a very tall man’s arm. To date, financialization isn’t on that list. In time, they will no doubt sort it out. Trying not to see makes it slightly more difficult. Meanwhile, the damage from the cataclysmic collapse continues.
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In his 12 August, 2005 NYT column, Paul Krugman’s answer to his former Russian émigré neighbor’s query as to how Americans made money was, “by selling each other houses.” The former neighbor was really asking, “how does a financialized economy work?” To which, Krugman could have answered, “by making money off the circulation of money.” Bitcoin, and other cryptocurrencies, must have been listening. There can be little doubt that they had read Sherman McCoy’s wife’s comment in re how he made his money in Tom Wolfe’s ‘Bonfire of the Vanities’. In the case of the ‘Financialized Economy’; will the ending be different?
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Somewhere around 2000, Merrill Lynch started churning their customers’ accounts. Did so for them; them being Merrill Lynch, its traders, and shareholders. There were commissions and thus profits to be made buying and selling the customers’ securities. Usually without their knowledge or consent; especially if the customers were elderly. By the time, twenty years later, Merrill was ordered to pay $Millions, the duffers were long dead. Fair to say that Merrill found deregulation and the making of money off money, financialization, tempting. An economic model they were quick to grasp. It was greed that killed Merrill Lynch.
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Being really rich is a positive feedback loop. At some point you are literally making money faster than you can give it away; just ask Bill Gates. On January 30, 2022, The Washington Post ran a story about the life of a $Billionaire they called ‘The moral calculations of a billionaire’. This guy is making $6-7Million a day on his stocks/unearned money. Yet, the very rich successfully spend $Millions on Congress types to get their taxes reduced. If this person paid a 50% tax rate on this income, it would still leave him an annual income of $1Billion (25% rate would leave him $1.5Billion/yr). If a working-class family pays a 30% tax rate on their $100k earned income; they are left with $70K for food, clothing, transportation, health insurance, childcare, housing, …, everything. Yet, the media plays the percentage card, the equivalence card. There is no equivalence whatsoever between the two. The very rich guy’s income after taxes is 10,000 times as much as that of the working-class family. If the $Billionaire paid 90% on his unearned income, he would still have $200Million after taxes income. The very rich man’s $1.5Billion after tax income comes out of the National Income. The more taken out by the very rich, the less there is for working class families. So it goes, and goes. The more that goes to the top the less there is for the rest of us. Since the very rich own most of the corporate stocks and bonds, they are the corporate master. It is their votes that keep wages low for working-class Americans, and the cost of healthcare high.
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It is the collective influence of the very rich over corporations that has kept the price of COVID vaccines too high for most of the world during this pandemic.
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Especially since the 2010 U.S. Supreme Court Citizens United v. FEC decision, we have seen those very rich with more money that they can spend pour money into our nation’s politics. Of late, we have seen a lot of their money go into state and local recall elections where they have no apparent reason, other ideological, for doing so. Turn outs in recall elections are notoriously low, so the threshold. They get a lot of bang for their buck. Besides, after buying several residences and a yacht or two, they don’t have anything else to do with it. They can take down a governor for pocket change; a sheriff, for chump. It is a most undemocratic, this game they are playing.
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Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, all the recent recall attempts, …, were some of the effects. Deregulation, union-busting, and financialization, in one form or another, in various combinations, were the causes.
Has financialization replaced capitalism? Hard to say given the nebulous nature of capitalism. Was there even ever such a thing as a capitalistic economic model? Did capitalism evolve, or was the rationalization thereof continuously being revised? If capitalism existed, it mostly did so in tandem with the industrial age. Both appear to have ended in the 1970s. Did the end of the industrial age bring about the end of capitalism? Whether capitalism ever existed or not, it no longer does. If it were the guiding hand, it has failed cataclysmically. Good riddance.
Over time, economic models have evolved. With some extensive overlapping; they have evolved from the family unit, to the tribe, to slavery, to feudalism, to mercantilism, to colonialism, then to capitalism. Each one is, in part, a continuation of the one(s) before. In toto, forming a continuum. Each, dictated by those with wealth and power. Seldom, if ever, asking, “How should it be?” “What should a society’s economy do for it?” The capitalism model and the industrial age were inextricably linked. So it was that capitalism’s days were numbered once the industrial age started to become the technological age. For more than 4 decades now, the question has been what is next? From then until now, we have had an opportunity to get it right for a change. So far, as always, those with wealth and power have acted to make sure we don’t take advantage of this opportunity.
If the successor to capitalism is an economic model premised on financialization, as it appears that it is, and, if, in a well functioning economy the requisite goods and services are efficiently produced and equitably distributed whilst all the while giving utmost consideration to human welfare and to the protection of the natural environment; the world is in trouble. Indeed, none of the current economic models are working well; some, hardly at all. What other metric for evaluating an economic model can there possibly be?
Mutual funds had been around since 1924, but it was in the 1980s and 90s that they obtained enough financial clout, began to exert significant power. By then, if you were a corporate CEO, mutual managers likely controlled your board, decided whether or not you got to keep your job. Screw the ‘invisible hand’ crap; they, the mutuals, demanded a certain rate of return or else. Gave us chainsaw Al and Jack Welch. Cost us a lot. A lot of enterprises and utilities were no longer viable by this metric. Changed the US’s industrial, agricultural, public utility, .., landscape forever. Did the mutuals hasten the financialization of the economy, or were they themselves much a part of it? The Latter.
During this same 1980s-1990s period, Leveraged Buy Outs (LBOs), around since the 1950s, began to play a significant role in the US economy. Strictly financial, the buyers often put up less than 1% of the purchase price, then leveraged the balance with a mortgage on the assets of the company being bought out. Who needs capitalism? Nothing epitomized the financialization of the economy more than Michael Milken’s junk bonds. Again, little pictures have big ears; so, too, nascent cryptocurrencies. Bitcoin shouldn’t come as a surprise.
Deregulation certainly enabled and abetted the financialization of the economy. A goodly flow of money, not the production of goods and services as before, is essential to the financialized economy. It is the flow that the financials tap from; taking their cut, so to speak.
Financialization isn’t just skimming, it was a way of having your cake and eat it too. As long as you could keep the cake inflated, the level in the bottle the same, no one would notice. By 2008, the cake was all bubble; the scotch in the bottle was all water. Today’s inflated home prices and the Dow Jones Industrial Average are very much the effects of the financialization of the economy that has occurred over the past four decades.
At a stretch, and with a good bit of mythology thrown in, capitalism as the basis for an economic model lasted several hundred years (more like two hundred-fifty). Financialization as the basis for an economic model will never see a hundred. It is simply too destructive, too inequitable, …,; too incapable of fulfilling the role of an economy. The sooner discarded, the better.
No doubt, there will be those who claim that financialization is but the latest, new improved, version of capitalism. It isn’t. It is much worse. Capitalism was all about a return on wealth; required the production of goods and services. Financialization is about making money off money. Money itself, the product.
For all China’s faults, they do seem to get it that an economic model is something a nation constructs according to what it deems best for itself. Europe has been moving toward thinking along the lines that in a well functioning economy, the requisite goods and services are efficiently produced and equitably distributed whilst all the while giving utmost consideration to human welfare and to the protection of the natural environment. The United States is still in deep denial. Is still coming and going while talking about capitalism, and getting back to then, and ‘being back’ from when, when we should be 80 years ahead of where we are. Rather going forward the past 40+ years, we have gone backward. In the US, the Citizens United decision and financialization, in tandem, have created and sustained a positive feedback loop. Money itself has become the basis for the economy, for our politics.
Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, and all the recent recall attempts were disastrous effects of changes made, or the failure to make changes that should have been made, in the economic model. Though they share causes and are strung out over a period of decades; the one most common to them all is the financialization of the economy. These failures, this period, also offer a snapshot of how inextricably economics, politics, and history are linked.
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https://en.wikipedia.org/wiki/Sherman_Antitrust_Act_of_1890
https://en.wikipedia.org/wiki/Clayton_Antitrust_Act_of_1914
https://en.wikipedia.org/wiki/Federal_Trade_Commission_Act_of_1914
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https://en.wikipedia.org/wiki/Ayn_Rand
https://en.wikipedia.org/wiki/Aftermath_of_the_repeal_of_the_Glass%E2%80%93Steagall_Act
https://en.wikipedia.org/wiki/Savings_and_loan_crisis#Home_State_Savings_Bank
https://en.wikipedia.org/wiki/The_Bonfire_of_the_Vanities
https://en.wikipedia.org/wiki/Enron_scandal#Timeline_of_downfall
https://en.wikipedia.org/wiki/West_Fertilizer_Company_explosion
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https://en.wikipedia.org/wiki/Airline_Deregulation_Act
https://www.latimes.com/business/story/2019-10-17/hiltzik-hedge-funds-pge
https://www.seattletimes.com/business/boeing-aerospace/what-led-to-boeings-737-max-crisis-a-qa/
https://www.c-span.org/video/?516218-1/flying-blind
influence of GE @ ~ 22.30
https://hbr.org/2001/10/inside-boeings-big-move
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https://www.investopedia.com/terms/f/financialization.asp
https://www.tandfonline.com/doi/full/10.1080/13604813.2013.853865
https://ritholtz.com/2012/11/ayn-rand-was-not-a-libertarian/
Ayn Rand Was NOT a Libertarian
November 30, 2012 1:30am by
Barry Ritholtz
Rand Hated Libertarians … and Many Libertarians Despise Rand
Many people assume that Ayn Rand was a champion of libertarian thought.
But Rand herself pilloried libertarians, condemning libertarianism as being a greater threat to freedom and capitalism than both modern liberalism and conservativism.
For example, Rand said:
All kinds of people today call themselves “libertarians,” especially something calling itself the New Right, which consists of hippies, except that they’re anarchists instead of collectivists. But of course, anarchists are collectivists. Capitalism is the one system that requires absolute objective law, yet they want to combine capitalism and anarchism. That is worse than anything the New Left has proposed. It’s a mockery of philosophy and ideology. They sling slogans and try to ride on two bandwagons. They want to be hippies, but don’t want to preach collectivism, because those jobs are already taken. But anarchism is a logical outgrowth of the anti-intellectual side of collectivism. I could deal with a Marxist with a greater chance of reaching some kind of understanding, and with much greater respect. The anarchist is the scum of the intellectual world of the left, which has given them up. So the right picks up another leftist discard. That’s the Libertarian movement.
***
I’d rather vote for Bob Hope, the Marx Brothers, or Jerry Lewis [than a candidate from the Libertarian Party]…
*
[I understand the confusion, but confusion is a natural consequence of superficial analysis and inadequate investigation.]
The actual Gilded Age was the period after the Civil War and before the permanent federal income tax. There had been a 3% federal income tax on annual incomes over $800 from 1861 to 1871 to pay for the Civil War. The permanent federal income tax was implemented in 1913 along with the central bank, replacing most tariffs, and bringing law and order to wild west capitalism. Initially there was a federal income tax credit for dividends that equaled the tax on those dividends that had been paid by the issuing corporation on its income. Often viewed superficially as a tax break for the rich, this dividends tax credit served as incentive to hold equities to collect dividends rather than sell them for capital gains, which have always been under-taxed, the actual tax break for the rich. During the New Deal Era the dividends tax credit was repealed in 1936 and then reinstated in 1939. In 1954 a Republican controlled Congress repealed the dividends tax credit for the final time. The first two leverage buyouts occurred in 1955.
The dividends tax credit made it difficult to buy controlling interest in a share owned firm when it was operating under profitable conditions. A troubled firm can be bought out with shareholders more likely to suffer losses than capital gains and would have no dividends to tax. So, fire sales of troubled firms were not impaired by the dividends tax credit, but the consolidations necessary for vulture capitalism were inhibited.
So, why did economists not support the continuance of the dividends tax credit? There were two “theoretical” reasons. A break on dividend taxes made shareholders resistant to the constant trading that churned the market and made share prices constantly shift with expectations and equities liquid. Economists were certain that firm consolidation improved economic efficiency and that anti-trust measures would prevent monopoly and monopsony conditions.
This stuff is real – too crazy to just be made up. It also provides more insight into what conditions might result in better outcomes, especially compared to a perp walk of dead folk.
https://en.wikipedia.org/wiki/Hanlon%27s_razor
Hanlon’s razor is an adage or rule of thumb that states “never attribute to malice that which is adequately explained by stupidity…“[1]
Didn’t Ayn Rand hate a lot of different kinds of people/beliefs?
Ayn Rand‘s philosophy of Objectivism has been and continues to be a major influence on the right-libertarian movement, particularly libertarianism in the United States. Many right-libertarians justify their political views using aspects of Objectivism. (Wikipedia)
Fred,
Yeah, knew that but was after the notion that if we tell stories and name names then we have successfully laid the blame and are done when in fact then we have not even started yet. Preening our ruffled feathers is not doing anything. However, that attraction that you note is almost entirely unidirectional. Libertarians admire Ayn Rand and her objectivist nerds, but objectivists object to Libertarian crudeness.
Ken
You touch upon many things I experienced, lived through, read about, and was impacted by. The last Sears and Roebuck in Chicago was closed a few years ago. It was on Six corners, the intersection of Milwaukee, Irving Park, and Cicero. It was the shopping center on the northwest side of Chicago before malls.
Before Christmas and after Thanksgiving, Sears would lay out a bunch of toys on counters on half of one floor. We would go and try them out till the sales people would chase us.
Things were simpler then.
I was very tired last night and did not finish this or proof read it. A story or factoid.
The Good.
The Sears of which I speak of was the largest concrete structure for a store built and built without windows to let light into it. On the corner of Irving Park and Cicero was a large picture window which was decorated for each of the seasons. You could almost buy anything there.
A Sears tire, battery, and auto repair was along Irving Park. A large grocery store (Hillmans) was in the basement. It was convenient and slightly overpriced. It latter moved across the street replacing the Goldblatts there which closed up.
It was a sound and middle-class place in which to go to buy products. If they did not work as planned or defective, Sears mostly took them back, replaced them, or refunded your money.
One could walk to it. Or one could take CTA buses on all three roads to get to it.
Old Sears Store, 75 years old in 2013.
Older picture, of course.
The Bad.
Since 2018 after it closed. it has sat vacant. I fully expected it to be torn down as the one building, a former bank, was. I am sure if one local prof. sees this, he may add to this with commentary.
Apparently, Chicago and the locals have agreed to do something with the building after long discussions about enough (if there ever can be such) affordable housing at the site. It was increased from 10 to 20%.
The Ugly.
And here is the Chicago politics taking hold. What was thought to be: 207 units times 20% would be ~40 units. And reality.
Apparently executive vice president of development at Novak Development, Jake Paschen said the company decided on six affordable units because it “makes sense for the development and for us … financially.”
I am wondering (this goes back to the fifties and sixties) if Jake Paschen is a descendent of the old Chis Paschen Construction and the later Paschen Brothers Construction? They were big around Chicago in the fifties and sixties. My dad worked for them and I later for an offshoot.
I took a long time and space on this. This neighborhood was a melting pot of people. Sears served just about everyone in the area. I grew here, left the Corps in 1968, and came back in the seventies with a pretty wife.
The old Sears (and this was the last one in Chicago) filled a void for the area’s population regardless of who you were or how rich you were. This concept is targeted to one level of income. Those who are taken in, will be interviewed and checked out extensively. This is what is wrong with us.
Before we moved to AZ, we spent time in the area. We went back and visited old haunts, old homes, etc. Just to remember what it was like. It is all still there; however, it has changed. The evolution of the Sears at Six Corners, Chicago is an example of how our nation is evolving.
Your words strike on a topic I wish more people would realize. We are changing and mostly not for the better.
Nice piece
Bill
Thanks, Bill.
‘The Gilded Age’ was meant to be disparaging. One of the interesting characteristics of gold (the element) is that it is extremely malleable, i.e. can be formed into extremely thin sheets, just a few atoms thick. After that, it can be used to cover objects (that’s ‘gilding’) so they appear to be far more valuable than they actually are.
“What is an economy for?” You need to ask yourself that and intentionally build one from the ruble after the old one dies. We just deny death. That seemed like the lost opportunity after Bush II.
One comment.
Glass-Steagall was almost totally outdated and useless when it was killed. Non factor in anything.
EM
The major reason for it being outdated was due to Greenspan allowing Main Street banks to intermingle with Wall Street banks in gambling on Wall Street. This started when Greenspan joined the Fed and they opened up a percentage of how much banks like Citibank could handle transactions. It reached 25% when they decided to repeal Glass -Steagall. People like Brooksley Born and Senator Dorgan were very much opposed to it. They chastised Born and hung her out to dry. She later quit the CFTC.
In that sense, you are correct in Glass-Stegall being outdated. Even so, the National Banking Act had to be changed so Citibank and Citi-Group could gamble on Wall Street. Some reading to back this up:
Economists View-Dark Pool Trading
WP Credit Crisis Cassandra
Angry Bear The Messenger Wore a Skirt
All those changes did was make the banks do some paperwork. The majority of loans issued during the housing bubble were issued by institutions not subject to Glass-Steagall. If it had still been in force, the rest of the loans would have been issued by institutions not covered by Glass-Steagall.
EMike,
The hybridization of commercial and investment banking plus insurance placed the liar loans within reach of credit default swaps. Hell, Goldman Sachs was taking its cut off of betting against loans that they themselves had securitized for their own lending customers and AIG tanked on losses from CDS written for outside betters to use the premiums to pay their daily losses and expenses, not the best Ponzi scheme ever.
Which is not to say that FSMA-1999 (Gramm-Leach-Bliley) and CFMA-2000 were not required to make financial services consolidation deadly, but it was the FSMA-1999 that repealed the last protections of Glass Steagall.
AIG was not subject to Glass-Steagall at all, and Goldman Sachs was barely subject to regulation from the act. Geez, any such regulation that might have occurred to any bank could be cured by a new corp in DE in a NY minute.
https://roughnotes.com/rnmagazine/2011/september2011/2011_09p012.htm
Public Policy Analysis & Opinion
AIG and the meth labs of finance
How the GLBA came to replace Glass-Steagall, and led us astray
By Kevin P. Hennosy
….The passage of GLBA led to a frenzy of deregulation by the states as state officials tried to entice support away from optional federal charter legislation. It was a kabuki drama where the regulators tried to demonstrate that they could be less intellectually curious and not as physically active as phantom federal charter-masters.
That is where I believe insurance regulation failed with regard to AIG, which was able to consolidate so much economic and political power that it could never be regulated. AIG became the meth dealer in the schoolyard as well as the boyfriend with the beer in the bedroom.
Financial meth
The concentrated economic and political power concentrated in the financial services industry through the repeal of Glass-Steagall provided the power to inflate the debt-inflated bubbles of the past decade. The Sub-Prime Bubble could have never inflated without poorly designed insurance products that insurance regulators ignored: Credit Default Swaps insuring Collateralized Debt Obligations.
AIG sold insurance on bond defaults without calling it insurance from a subsidiary that was not called an insurance company—but AIG sold insurance on bonds. Under functional regulation, the state insurance regulatory system had jurisdiction and responsibility to regulate AIG in all of its manifestations. I respectfully disagree with Mr. Erlanger over whether the regulators fulfilled their role.
State insurance regulators had to want to regulate but they feared the power of companies like AIG, so they didn’t. Which brings to mind another quote from President Roosevelt:
“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism—ownership of government by an individual, by a group.”
Repeal of Glass-Steagall was a mistake, which should be remedied through new legislation.
Failure of insurance regulation. Does this guy understand that Glass-Steagall had nothing to do with insurance?
Then he adds in lending without an fen clue.
EM
Who is talking about bank loans?
Bank loans started the whole thing.
EMike,
[Below is another excerpt from the same link that you argued against.]
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…The GLBA repealed the Glass-Steagall Act, which had separated the insurance, banking and securities sectors in the years between 1933 and 1999. The passage of the GLBA not only enabled or invited but ensured the financial collapse of 2007-2008, which lingers to this day. Without repeal, the GLBA threatens to do more damage.
Firewalls
The Glass-Steagall Act, or the Banking Act of 1933, arose from the wreckage of the American economic collapse of 1929, and the investigation of the American financial sector conducted by Ferdinand Pecora on behalf of the Senate Committee on Banking and Currency.
As Ron Chernow wrote in The House of Morgan, the Glass-Steagall Act “was meant to restore a certain sobriety to American finance.” As the Pecora Committee documented, and Chernow explained, “In the 1920s, the banker had gone from a person of sober rectitude to a huckster who encouraged people to gamble on risky stocks and bonds.”
In addition, the involvement of deposit-taking and loan-making commercial banks in the underwriting and sales of securities was fraught with conflicts of interest. Again, Chernow wrote: “Banks could take bad loans, repackage them as bonds, and fob them off on investors, as National City had done with Latin American loans. They could even loan the investors money to buy the bonds.”
Furthermore, the management of the Federal Reserve System feared that they might have to bail out member banks based on the weakness of a non-bank financial affiliate. In 1933, the federal government had no jurisdiction over insurance and securities markets, yet “The Fed” was expected to step in to shore up a commercial bank weighed down by losses unrelated to deposits or loans.
Glass-Steagall prohibited bank holding companies from owning other kinds financial institutions, but it tended to separate banking, securities, and insurance into distinct recognizable forms. It was the absence of such distinctions that led to problems at AIG and other institutions, which I will address later…
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[EMike,
Granted that Kevin P. Hennosy is just a business and finance writer at Muck Rack rather than a public administration official, but he is not just a retired banker either. What he writes about Glass Steagall agrees with what I have read elsewhere, but what he wrote in the linked letter ties the repeal under GLBA to the failure of AIG, which was the starting situation.]
I see nothing whatsoever showing Glass Steagall had the ability to regulate insurance companies. I see a lot about ” deposit-taking and loan-making commercial banks in the underwriting and sales of securities” and AIG’s investments in such caused their problems, but not anything that details how the Act could have prevented AIG from their investments.
EMike,
AIG was an insurance company that dipped its toes into investment banking which lines of business could not be mixed under the same bank holding company before GLBA. GLBA was not passed for AIG’s benefit, rather that was done to legalize the merger of Citicorp with Travelers, which ironically was undone before the crisis even began. Of course, CFMA was the bigger culprit for AIG, but the inherent conflict of interest between risk adverse insurance and risk prone investment banking contaminated the executive level of the firm. A link below to a more neutral source than either of my prior two is also less decisive on the role of GLBA.
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https://www.investopedia.com/articles/economics/09/american-investment-group-aig-bailout.asp
Falling Giant: A Case Study of AIG
By
Gregory Gethard
Updated January 30, 2022
Fact checked by
Timothy Li
Why Could AIG Have Been Considered a Falling Giant?
You may be surprised to learn that the American International Group Inc., better known as AIG (NYSE: AIG), is still alive and kicking, and is no longer considered a threat to the financial stability of the United States…
…The epicenter of the crisis was at an office in London, where a division of the company called AIG Financial Products (AIGFP) nearly caused the downfall of a pillar of American capitalism.
The AIGFP division sold insurance against investment losses. A typical policy might insure an investor against interest rate changes or some other event that would have an adverse impact on the investment.
But in the late 1990s, the AIGFP discovered a new way to make money.
How the Housing Bubble’s Burst Broke AIG
A new financial product known as a collateralized debt obligation (CDO) became the darling of investment banks and other large institutions. CDOs lump various types of debt from the very safe to the very risky into one bundle for sale to investors. The various types of debt are known as tranches.
Many large institutions holding mortgage-backed securities created CDOs. These included tranches filled with subprime loans. That is, they were mortgages issued during the housing bubble to people who were ill-qualified to repay them.
The AIGFP decided to cash in on the trend. It would insure CDOs against default through a financial product known as a credit default swap. The chances of having to pay out on this insurance seemed highly unlikely…
EMike,
Of course, state BoI’s have always regulated insurance. Differences between states on life are minimal so insurers can be licensed in multiple states. Then CFMA said CDS (or perhaps derivatives in general) could not be regulated.
EMike,
The linked PDF agrees with you. I have read both POVs several times in the past. I think of it mostly along behavioral lines taken within a framework of realism centered more on institutional constraints instead of regulatory restraints which can subject to regulatory capture.
https://web-docs.stern.nyu.edu/old_web/economics/docs/workingpapers/2010/White_The%20Gramm-Leach-Bliley%20Act%20of%201999.pdf
Also, I do consider the source.
Always wise to consider the source. Strangely enough, those that tie AIG’s failure to Glass-Steagall ignore the fact that it had no impact on what insurance company investments could be, also ignore all the other insurance companies that made similar investments (though nowhere to the extent of AIG). One I remember was Cigna, who ended up suing the banks for fraud.
This one is pretty good. It supports your contention even though it says GS repeal created an atmosphere for what occured.
GS Repeal
There sure are a lot of sources to consider. The AIG failure and bailout was a windfall for long form investigative journalism.
EMike,
When I worked in (primarily life) insurance, then mortality reserves were partitioned into tranches at different investment risk levels, the largest being safe such as Treasuries and the risky stuff was a very small tranche (maybe 10% – but memory not so good on such details from 45 years ago). Expense and commission reserves were relatively small, low risk, and liquid.
Ron:
What almost put AIG in the ground was Goldman Sachs calling in its CDS which AIG bought up and did not have reserves set aside for paying them. If you remember Credit Default Swaps were initially bets on default of tranched CDOs later becoming insurance for the same, bearing the risk of CDO default. Naked CDS were the counters.
Think I have it right.
The Gov and the bank of last resort stepped in to rescue AIG which they did not do for other investment firms. The Fed also made them all banks so as to fund them. They still are banks and the Gov has given them a longer leash so to speak recently.
You all seem to forget, AB has a plethora or a lot of information which you can search for by inputting Glass Steagall. Brief list:
The Blog Post to End All Blog Posts: 1 of 2 – Angry Bear (angrybearblog.com)
Drum Debates Drum – Angry Bear (angrybearblog.com)
Never let an Economist use “Unintended Consequences” Again – Angry Bear (angrybearblog.com)
James Galbraith remarks – Angry Bear (angrybearblog.com)
“Never predict anything, especially the future,” as Casey Stengel wisely said. “But let’s look, instead, at the past.” – Angry Bear (angrybearblog.com)
What went wrong ? – Angry Bear (angrybearblog.com)
Houghton and Waldman in addition to other smart writers (except for one) are a part of this brief list of people.
Back a decade or so ago, I presented at Economist’s view a timeline of how all of this took place. Thoma took exception to my timeline and I was almost banned. I can resurrect it and present it again if need be. Thoma and I settled our differences. I was sitting in an airport in China at the time.
Run,
I did not forget anything. I did not begin to read here until a while after EV shut down at the end of 2019. Also, I did not search specifically for this site, but Google’d the entire Internet for supporting doc. Now that I have read your list of links, then none were as definitive and/or decisive as other sources and the first few were just poorly done. But I did like the James Galbraith post because James like his dad JohnK is essentially of the institutionalist school of economics; i.e., a water brother to me as it were. Then the last post (What Went Wrong) by Waldmann and Kevin Drum was expansive enough to encompass reality which most often stands in stark contrast to the reductionist PoV. The realist PoV is entirely compatible with the institutionalist school of economics or maybe it is the other way around.
Ron:
You are entitled to an opinion . . .
Ron:
Of course, we will disagree on this also. Waldman and Houghton are both very good at deciphering the issue(s). Also, the world of internet Economics blogs has been shrinking for a while now. It was no surprise EV was retired. Much of his support came from Angry Bear in the beginning.
Run,
BTW, what distinguished EV that got me on board there in 2010 had more to do with the depth of peanut gallery than it had to do with the depth of the papers published there. Academic articles were regularly criticized there, including even Paul Krugman’s articles at times. Thoma did provide a breadth of academic posts for threads, but much of the more profound depth got added in among the comments. Also, Thoma allowed almost free reign among the comments other than drawing a line against outright profane hostility. That was probably in the interest of his own time as moderator, but it paid dividends on his less is more approach. Of course, Internet flame wars do not generally add valuable content (aside from Owen Paine and Mark Sadowski slugging it out in their ongoing fiscal vs. monetary supremacy war), at the same time it was easy enough to scroll by the useless while there was little to restrict participation by so many with a wide variety of backgrounds and experiences outside of the ivory towers of academia. At least for the first few years there it held peoples’ interest enough to propel it into broad recognition. By the time that Thoma retired, then interest was probably waning anyway. People realized that this time was not different after all.
Run,
There are more good writers than good systems analysts. Systems analysts is generally an IT term but why not use it across all systems theory applications? In any case, there still are not that many good writers either.
If one leaves the cheese out, then eventually the rats will eat it. Do we blame the rats?
Thoma clearly began to reevaluate his priorities after his wife died. EV was retired when Thoma retired from U of O.
Here is a bit of Brooksley Born, Iris Mack, Bryan Dorgan for you plus the villans
“The messenger wore a skirt,” says Marna Tucker, “Could Alan Greenspan take that?”* – Angry Bear (angrybearblog.com)