Financial Reflections

Between the bank bailout, the auto industry bailout and the stimulus plan, the US government has throw almost one and a half trillion dollars into the economy. The good news is that this may make a short term impact on the economy. The bad news is that we may be headed right back into the same problems as soon as the economy stabilizes.

Learn More: Buy The Return of Depression Economics and the Crisis of 2008

Why all the doom and gloom? In spite of the government’s best intentions, it’s my opinion that we’re really not fixing the root of the problem, which is the lax lending and banking laws After throwing over a trillion dollars into the economy, partly to remove “toxic debt” the laws that allow it are still in place.

Let me explain. After the Great Depression, the Glass-Steagall Act was passed. The act, in part keeps banks from getting involved in issuing credit and turning around and making investments. That kept banks limited in what they were allowed to do for decades, and for the most part, the economy did OK.

In the 1980’s there were moves to repealing the act. After all, things were going fine, and banks could handle things better now that the Great Depression was a half-century in the past. Changes were made and rules were relaxed. Then came the economic boom of the 1990’s.

At the end of the 1990’s the Gramm-Leach-Bliley Act was passed in 1999. That act passed on a vote of 214 to 213 in Congress and allowed banks to become conglomerates that allowed banks to do a lot of things they hadn’t been able to do.

One of the things that banks could now do is create investments, such as mortgage-backed securities out of the money they loaned. As many people know, those investments, combined with sub-prime lending and “exotic” loans, such as interest-only mortgages and a variety of adjustable rate mortgages, were a big part of the cause of the “toxic debt” and real estate meltdown that’s fueling our current recession.

Unless we change the laws, it stands to reason that we’re going to end up in the same mess all over again. It took just 10 short years after the repeal of Glass-Stegall for us to end up in one of the worst recessions since the Great Depression. Maybe the next meltdown won’t involve real estate, but I’m of the opinion that it will happen soon.

Here’s some great resources to learn more:

From the gigantic brains at Wikipedia:

• Gramm-Leach-Bliley Act
• Glass-Steagall Act

From the other gigantic brain at PBS Frontline:

• The Long Demise of Glass-Steagall

What bothers me about this is that for all the talk I see about the stimulus, I don’t see any talk of changing the banking laws. Maybe we don’t need to go all the way to completely reinstating the Glass-Steagall Act, but we need to do something, or toxic debt will continue to poison our economic system.

What do you think? Am I way off base here? Let me know in the comments below…