Bank History: A business and economic review (part one)
With President Obama now “going after the banks” with a “new” round of proposed taxes and regulations, it might be more than worthwhile to review some of the history that has gotten the U.S. and its current state of the economy and business to the point we now find ourselves in. Whether you like or dislike, agree or disagree with the actions of so many bank executives today, the fact still remains at least in the short term that the further uncertainty that the Administration’s announced intentions have caused are having the unintended consequence of “drying up” the banks’ lending windows even more than they already have been.
America and the world operates on credit, and small businesses, especially, need access to daily lines of credit from banks to finance their daily operations, not to mention further growth and expansion. This is particularly noteworthy when one understands that small businesses, for well over the past 30-plus years, have been the source of almost two-thirds of all new jobs created in America. Allowing this job-creation “engine” to renew its work would go a long way toward whittling away at the national unemployment rate now well above ten percent. Calling into question access to such needed daily operation funds, as well as any funds needed to finance expansion, certainly causes most businesses to, at least, delay their decision-making, especially in times of economic uncertainty.
For well over 66 years, the banks were operating under a law that, if still in effect, as most experts suggest, would have most probably prevented the banks from entering into the types of highly risky activities that caused the economic crisis that, ultimately, began to reverberate around the world. What is this law and what happened to it?
In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act. This act separated investment and commercial banking activities. At the time, “improper banking activity”, or what was considered overzealous commercial bank involvement in stock market-type investments, was deemed the main culprit of the financial crash.
At the time (and perhaps since then, too), commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets, but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks. (This sounds quite a lot like the so-called “subprime” mortgages and then “packaging” these loans to sell to other “investment” banking firms, doesn’t it?)
Part two of this column will appear next week in The Beach Observer.
Paul Rendine is a financial advisor with over 30 years of experience. He can be contacted at his email address at quoteman3@aol.com with any comments or questions.