The Dow Jones soars today after news that Europe will be bailing out some of its banks and that the US will potentially be buying preferred stock in 9 top financial insititutions. It’s the biggest one day percentage increase since 1933. Markets Rally. Traders shed tears of joy. Mass hysteria all around. Then we all go silently into the night just to awake to another day filled with brand new thrills in the world economy.
We have certainly created a beast my friends. This beast was created shortly after our last Depression and World War II. It has slowly twisted and contorted itself and has mutated into what it is today. That beast is the system we established at Bretton Woods in 1944. It is why we are so interconnected as we are right now.
Economic turmoil has happened before and it will happen again. The difference now is that maybe the system will be pushed so far that it will collapse and we can start again new. At least one hopes. Everyone seems to be afraid of it collapsing, but collapse it must, if we are to move onto something better.
Why do old worn out cliches seem to ring so true right now? ”Those who cannot remember the past are doomed to repeat it” – George Santayana
I have spent so much time researching and studying economics to try and make some sense of this situation. Not only to make sense of it, but to make it short, concise, and clear as day so I could help other people understand what is going on.
What is amazing is that everything seems to revolve around this one little thing called the Glass – Steagall Act. It is also called the Banking Act of 1933. Funny how that date keeps popping up…
The Glass-Steagall Act kept Commerical Banks from dealing with Investment Banks. Meaning commercial banks couldn’t use their funds to play Russian Roulette in the market. Vice Versa, investment banks couldn’t raise money the way commercial banks do, through savings and checking accounts, as well as government credits. This is kind of like the concept of seperation of church and state.
The thing is that many people have wanted to get rid of this act for a long time. They saw all this money “sitting” in commercial banks and thought to themselves, “Wouldn’t it be great if we could invest this and make even more money?” Many institutions have tried to bring this act down, but for a long time Congress, the President, and the Supreme Court all thought it was a bad idea.
That was until the merger of what I like to call the “unholy trinity”. Citibank, Salomon Smith Barney, and Travelers Insurance. The thing was that this merger was illegal until parts of the Glass-Steagal Act were repealed. Through $100 million in lobbying efforts by Citibank, Congress eventually repealed parts of this Act in 1999. It doesn’t take a genius to see the exact point at which home prices started to skyrocket right along with the introduction of many new, wonderful, fasinating, exotic mortages to get people in houses they really couldn’t afford. Hence, the subprime mess we are in…
For all intensive purposes this money is not real. It is only real and has value because that is what we make it. These greedy corporations and politicians created a system that added no value to the world, the nation, or to the American public, but only to their own selves. The point is that this newly formed mega conglomerate was now about to use funds that were “tied” up in Citibank and Travelers Insurance to gamble on the risky venture of subprime mortgages. Everyone started jumping on the bandwagon and off we went into this wild west of “free money” for anyone interested in buying a home.
Stock markets will rise and fall, we will continue to hear stories of greed and corruption, and sometimes we will have to pay for things we shouldn’t owe. The system needs changing. We know this. Call me an optimist, but I truly believe politicians will correct their mistakes and try to make something better out of all this. I don’t hold much hope for the ultimate solution they will create, but I know we can make something better. My fear is that we will continue making the same mistakes over and over again once we do solve this, but we each have our own personal responsibility to attend to. To do what we believe and trust is right…
The take away point is that we should seek to find ways to provide value to those around us, and by doing so we all become richer, regardless of what is happening in the world around us…
Thank you for reading. As always, I welcome your questions, comments, and smart remarks…
* This was posted on a recent Carnival of Economics.
If you enjoyed this post, make sure you subscribe to my RSS feed!
Stumble it!
[...] I will be posting a much longer article about the history that led up to this current mess we are in, but the take away I really want everyone to get is how [...]
Well written, thoughtful.
[...] The problem begins when banks start to speculate. I talked a lot about this in my previous article, The Death of Dow Jones. In it I talked about a little Act that not many people have heard of called the Gramm-Leach-Bliley [...]
[...] The Death of Dow Jones is true. We definitely will not see the Dow rise above 10,000 this year and may not see it above that mark for the next 5-10 years. [...]