CONTINUE:
They decided that for much of the country's history banks were very tightly regulated and scrutinized by regulators (the regulation referees watching the game closely), but that as the economy heated up after World War I, there were several groups of decisions that concluded it was best not to regulate banks and business because bankers and stockbrokers new how to make the economy grow, so many regulations were eliminated (deregulated) to let the banks and Wall Street work their magic.
A couple of things were decided to be bad, as opposed to good. One is that there are basically there are two kinds of banks. Commercial Banks and Investment Banks.
Commercial Banks are where hard working Americans deposited their money in checking and savings accounts and the commercial bank, when regulated, made safe loans, but when they were not regulated they made not so safe loans. Much like sending elementary school kids outside the school house for recess but not sending teachers out to watch them because of course "the children could regulate themselves and would not get into mischief".
Investment Banks are not anything like commercial banks. In fact if are talking about your foreclosure and the ruination of the American economy (everyone is now repeating what I have said since 2012. "Things are not getting better.") We should not ever even think of the term "Investment Banks" but instead call these "stockbrokers something like vandals, wevils, racketeers, devils and wastes of skin and also riff-raff".
The smart guys concluded that when you deregulate banking and allow the merger of an investment bank with a commercial bank, the stockbrokers will eventually begin to use up the stockbroker money which belongs to people called investors who look for risky bets because they make more money, some of the time. At least, these investors know that they are letting their stockbroker gamble with their money, but they still shouldn't be cheated. The Risky Bets should at least be honest bets. But, often a game is added to the risky bets to make them more fun and dangerous. One well known name is Ponzi Scheme.
This scheme is named after New York city slicker Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. He never reached that goal. (He never intended to. Postage Stamps?)
When that investment side money gets kind of tied up and, you know, "lost", the stockbroker guys need more money to shore up the risky investments that aren't working as well as hoped.
I am sure you have noticed that I have never claimed that these stockbrokers, wevils, devils and vandals sometimes invest their own money in the risky bets. That is because simply they never do. This is because all of their money is all tied up in boats, corporate jets, houses with bowling alleys, other houses in vacation spots, fine gangster suits, and cocaine just like celebrities, athletes and rappers. They use the OPM system. That means they only use other people's money.
Because the stockbrokers are very silver tongued they can make their old under producing investments sound mighty good, even to the conservative commercial guys who are supposed to be "risk averse". Finally, everyone concludes that these pools of old investments are "can't lose" deals.
To fund these supposedly new investments the commercial bankers let the stock brokers loan out the family and local business checking and savings accounts for the risky bets that have gotten them into a pickle.
But, the "can't lose deals" keep losing and the stockbrokers have to recruit new investors to raise the money to keep payments current on the investments that have wiped out the deposits in the "merged" investment bank and the commercial bank. That is the start of the game invented by Charles Ponzi, who certainly didn't invent the game Monopoly which is a well regulated game.
The Ponzi Scheme is a strange game. It can only work if you keep selling mythical investments to new investors, but about every Ponzi game eventually runs out of new people dumb enough to join in. That last guy who didn't even play the game is called the winner. Everyone else loses.
Bernie Madoff is the World Champion at this scheme. He blew up his investors in his Ponzi Scheme that lasted several decades and his customers lost over $50 billion. The strain of keeping the game going for so long finally damaged his brain and he went to a nearby prison and begged them to let him in. Yes, he was the individual champion of Planet Earth.
The Galactic Combined Champions are Wall Street. Their game is still going on and it has surpassed $50 gigibagazillion. They are still selling worthless bonds in mortgage-back asset Pass-through REMIC Trusts backed by, Fannie Mae, the biggest crook in the whole deal, these bonds are being sold in alleys and children's parks across America every day
So, what did the smart guys come up with? Some regulations (rules) to replace the regulations that had been deregulated and rehired some new regulators (referees) to enforce the new regulations.
They got a new set of Finance Regulations passed and they called it the Glass Steagall Act of 1934. Like I said it addressed the two main problems by:
1. disallowing mergers of commercial banks and investment banks (remember "stockbrokers) entirely. I think that they couldn't even go to lunch together, unless they were brothers, nor even live on the same streets.
2. They also invented the Federal Deposit Insurance Corporation (which we know as the FDIC). You see, not very many people know this but our current stagnant economy and the bust that caused it are far greater than the Great Depression. The thing that makes the Great Depression look so much worse than today's problems is that none of the deposits in the commercial banks were insured by the government in 1929. This meant that if the bank in your town failed after 1929 you failed. Every business in your town failed. Every farm and every factory failed. You failed and all the other citizens in your town failed. There was no way to get things going again. There was no possible stimulus to jump start anything. The Great Depression seems like it was worse because the money was not redistributed, it was gone.
In this current never-ending crisis you didn't know it, but your money somewhere, somehow was replaced after it was lost.
Ok, this is too much for one day. Tomorrow I am going to explain why the Glass-Steagall Act of 1934 protected the country from another cataclysmic economic crisis for 63 years and then it stopped working in 1999 and nine years later we nearly took down the whole world's economy. We brought the Russian stock exchange to a halt for seven days. We also still haven't fixed what went wrong.
Tomorrow. Peace Out. Danny Hammond
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