Big Bank Bohemoths & My Economic Solution

Today in the wake of Obama’s jobs summit and the plethora of speeches on the economy, we’re going to have a small history lesson.

One of the problems that I hear over and over again (in that plethora of speeches) is how the government gave all that money to the banks to bail them out so they could start lending again. But, now, (shocker) they’re not lending. Now I have a theory. Sure, lots of people are defaulting on mortgages because of variable or resetting interest rates resulting in crazy huge bills that they can’t pay because they’re unemployed. But how the heck are they supposed to go out and start their own small businesses if they can’t get a loan? (No, of course I am not talking about myself! Wink, wink!) Face it though, banks have lots and lots of other ways to make money. For example, investing!

For a complete list of where Citigroup Inc makes their money for example, check out their most recent 10-Q. http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6877451-1106-1291714&type=sect&dcn=0001047469-09-009754 By the way, if you can read it, can you let me know what it says? I’m five minutes away from being a CPA and I pretty much barely understand it.

Back to my last point though, banks can invest in lots of things to make their money these days. Like hedge funds or derivatives. Both are totally safe investments, of course, so when they take your hard earned money that you put into your savings account to get a whole 1.5% interest and they put it into a derivative investment and either make lots and lots of money or lose everything, I’m sure we can all feel good about it.

Anyway, I believe I promised you a history lesson. Way back in the day (when people were partying like it was 1999, because it WAS 1999), three senators wrote a bill formally named The Financial Services Modernization Act of 1999. (Informally the bill is called The Gramm Leach Bliley Act or GLBA – go ahead, I give you permission to laugh!) The first section of the bill repeals Section 20 of the Glass-Steagall Act to now allow mergers between securities and banking companies and also repeals Section 32 of the Banking Act of 1933 to permit officers and directors to serve in those capacities for both securities and banking companies. To read the Senate Banking Committee’s Summary of the Bill check this out: http://banking.senate.gov/docs/reports/s900sum.htm.

To give you an idea of how popular the bill has been since its passage, economists Robert Ekelund and Mark Thornton have stated that the bill, “amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly.” Economist Paul Krugman called Senator Gramm, “the father of the financial crisis” because of his sponsorship of the bill. Yikes.

Here are my thoughts: bring back Section 20 of the Glass-Steagall Act and Section 32 of the Banking Act of 1933. As if the banks weren’t already too big before this crisis, now there’s only five large banking institutions left. What’s going to happen when they mess up again? Do you think maybe they’d start lending again if we took away their securities? It’s time to break up the behemoth party. And if I’m not convincing as an economist, check out economist Robert Reich’s personal blog: http://robertreich.blogspot.com/2009/10/too-big-to-fail-why-big-banks-should-be.html. (I love that I use the same blogger as Robert Reich! It gives me goose bumps!)