Something sure to get Simon Johnson's heart pumping: Via the Journal's Real Time Economics blog, I see that John Reed, the man who helped deliver the coup de grace to the Depression-era law against combining commercial banking with investment banking and insurance, now wants to bring it back. (In 1998, Citicorp, run by Reed, merged with Travelers, essentially an insurance company that also owned the investment bank Salomon Smith Barney. But the merger was more or less conditional on the law being repealed, which Reed and Travelers CEO Sandy Weill then successfully lobbied for.) Here's what Reed wrote last week in a New York Times letter-to-the-editor:
As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.
This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.
Wow. Maybe the concensus on this really is starting to change.
Good for Reed, I appreciate his doing the right thing.
Explain how this is the right thing? Repeal of GS occurred under Clinton-with Robert Ruben leading the charge. Now one guy checks in and the world is supposed to move? I guess you guys are still clueless on how the system blew up-thinking it was repeal of GS or lack of regulation. First, thoughout Europe-where regulation is at the highest-in many countries their housing prices doubled just like here. Some say it's due to low interest rates, others the push for low-income lending, few, if any, attach repeal of GS to housing bubble. Second, quasi-government agencies-Fnmae and Fmac were world leaders in purchasing directly, and through securitizations, the risky loans. Without that leadership, some/much, of the bubble could not have happened. Third, the big banks (who could make loans and do securitizations) did buy a signficant chunk of the low-income loans-but-they bought AAA tranches (they could have easily earned more through A or AA paper-but they didn't) and they further insured the investments with credit default swaps--hardly risky endeavors. Fourth, assume GS was in place, then, what would have happened-the exact same thing. Banks and other entities made the low-income loans, investment banks and others securitized them, and the banks would have bought them. Finally, the post-GS banks were following the international rules of capital requirements-which starts at 8%, but moves down to 4%---the world, the regulators---said 4% was OK for AAA residential paper. So, which regulators were wrong: the ones who repealed GS or the ones who said AAA residential paper neede only 4% reserves? Think, my man, think.
Not quite true. Regulation had become extremely lax over the 1990s in London too, no matter what it said on paper. But in general the countries that have fairly robust regulation, e.g. Switzerland, Germany, haven't suffered the same crash we have had.
Smaller countries like Ireland that were playing in a bigger game than they could handle have had real problems, like a micro-version of our housing market collapse.
There is the other unique variable-the push for low-income loans. How can London's regulations become "extremely lax" when you progressives have been running the show for decades. What "robust" regulations do you refer to in Switzerland and Germany? The banks who had trouble ran the gamut-including France-as they bought these residential AAA securities. If they're rated AAA, and you buy credit default insurance, and the world banking "regulation" specifies 4% capital reserve-what regulation can you envision? I've said elsewhere, 26 years ago when I bought my first house, I needed: 20% down, proven income, proven assets, home costs (debt service, insurance and real estate taxes) at no more than 28% of income and all debt costs at no more than 33% of income. That worked. No bubble or financial crisis with those standards in place. Question, remains-who allowed those standards to be relaxed and why? Funny thing, Mr. Road, my investment banking buddies and I were quite amused at the loan business: we'd get the letters (borrow 100%, no costs, low rates-1%), it was clear to us what was happening. We had friends who left good jobs to work in subprime market-fine. We saw Wall Street pricing risky loans at unheard of spreads to treasuries-just way too low based upon historic norms. Call it greed. Call it stupidity. But very smart people saw the housing prices skyrocket, knew what type of loans were being made and still bought the paper-including banks and pension funds in Switzerland and Germany.
I don't think progressives have been in charge in London in the sense you mean:
http://www.guardian.co.uk/commentisfree/2008/dec/02/will-hutton-banking-rbs
Craziest commentary I've ever read-Road. I worked in Japan, with their banks, in the mid/late 1980's until about 2002. Their system was simple: crossownership of stocks with their clients and wildly aggressive lending throughout the world (they'd take, as collateral, memberships in golf courses which cost millions of dollars in that inflated world). Then, by 1990, it collapsed and the government spent over a decade hiding the problem. Rmember this: their stock market was at 45,000 around 1989-it's never been above 20,000 since. Their homes and commercial real estate-across the board-fell over 60%. I can't speak to the rest of Europe's lending practices. I believe that Scandinavian countries are more cooperative than larger, more diverse countries. I find it a little weird that Britain led the world in lending and investment banking throughout the industrial and colonial ages-and now-make simple, fully secured, short term loans which they call at first sign of trouble. Sounds like a typical progressive rant about the hated big business and banking world. Finally, my question/issue was/is: with progressives controlling British government-did they not impose the kind of regulations that Obama is considering today?
Because they weren't/aren't "progressives" in the older sense you mean, or not when it came to banking and finance at least. New Labour totally bought into the unregulated capitalism that was touted as the way to universal prosperity. If anything, Blair was even more aggressive that conservatives had been about not putting brakes on the financial markets so that London would remain a key center in global finance. To that extent, I find the assumption behind your question kind of strange -- I mean, everyone knows this, right? It's not a fact at issue.
What's not the matter with Kansas.
Can any governor succeed in California?
Colorado and Ohio turn left.
Kentucky swings the other way.
New Hampshire warms to Democrats.
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