First of all, I apologize for not being able to contribute to these pages for the past month. I had a bit of surgery to correct a small problem with the blood flow of the arteries in my legs and I took a short break before I was ready to write again. But if you think I’m going to pass over the current economic crisis without comment, you don’t know me very well.
Over the past weekend, rereading Barbara Tuchman’s March of Folly: From Troy to Vietnam. The premise of this book is that in the most important moments of history’s great crises, governments have decided to directly oppose the immediate and long-term interests of that government.[1]
According to Tuchman (pp. 3-6) a government policy must meet three criteria to qualify as “foolishness”;
1. It must be seen that the opposites are in their time, not secretly.
2. A feasible alternative course of action was available at the time.
3. Policy should be adopted rather than individual action and its impact should continue beyond one political life.
Let us now look at the current situation in light of Tuchman’s definition of stupidity.
The current situation has its roots in the Glass-Steagall Act of 1933 which divided the banking industry into two categories: commercial banks and investment banks.[2]
A commercial bank is an everyday, run of the mill, street bank, where you deposit your money, you have savings< /a> and get a loan to pay for your new car. On the other hand, there is the federal bank, state and municipal bonds of purchase and sale; financial affairs expansions, and managing large amounts of money such as pension plans, IRAs, 401-k accounts and mutual funds.
Under Steagall’s glass, commercial banks were not allowed to trade in securities or to underwrite any form of securities other than government bonds. Commercial banks were limited to lending to individuals and conducting business in accordance with regulations from the Federal Reserve System. They were abandoned as hostages.
The system worked quite well until the mid-1980s, when the Reagan-boom market created huge profits for investment banks. Again, the commercial banks began to lobby for the relaxation of the rules that prevented them from taking “partial action” in the investment sector. In 1999, commercial banks passed the Gramm-Leach-Bliley Act.
Under the Gramm-Leach-Bliley provisions, commercial and investment banks were allowed to consolidate into one institution that had free reign to offer everything from passbook savings accounts to speculative investments such as commodity futures and credit default swaps.
For 8 years the financial markets operated as if the Great Depression had never happened and prosperity would reign forever. The regulation of markets is either disorganized or non-existent. Then came the near collapse of the housing sector and the resulting $80 billion federal bailout of Fannie Mae and Freddie Mac.
According to Tuchman’s evidence, the Gramm-Leach-Bliley Act meets all of the requirements for a presumption of insanity.
There are many voices opposed to the bill, most of them well-respected by economists, who have warned that the merger would allow banking functions to heavily focus on the regulatory structure and capacity of agencies such as the Securities and Exchange Commission. let the new economic giants “cook books” to avoid taxes on their products.
As for the second demand, that a reasonable account should have been available, it was clear that the system had worked and that the proposed changes were directly to the envy of the commercial banks in the profits made by the investment banks. In view of these things, the more reasonable thing to do would have been to do nothing.
The fallout from today’s near-collapse economic infrastructure meets Tuchman’s latest criteria: this is the news we’re likely to see in the next decade.
I invite you, kind reader, to join me in sending some emails to our Congresses and meetings with a message so simple that even a politician can understand;
“Get off your influence asses and start doing what you were elected to do, what is in the best interest of the American people!”
[1] Tuchman, Barbara. The March of Folly: From Ilium to Vietnam. New York: Ballantine, 1984. [2] Traces of the Glass-Steagall Act as well as the theater Gramm-Leach-Bliley Act are included under various titles in 12 chapters, United States Code (12 USC).