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Dodd-Glass-Frank-Steagall, Gramm-Leach-Bliliey?

dodd_frank_signing-300x202The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has its merits but  is, without doubt, no Glass Steagall. A bit of history is in order to get a real understanding as to why the Dodd-Frank Act is lacking in many ways. In reply to the devastating damage done by the “First Great Republican Depression” (FGRD) of 1929, Congress enacted the Glass–Steagall Act of 1933. Glass-Steagall established a formidable barrier between Investment banking and mortgage banking.

The Glass-Steagall Act protected the interest of home owners and solidified the foundational underpinnings of our financial institutions. Glass-Steagall protected the nation from the infinite greed of the market for the next 66 years without a major crash of our financial institution  That is until the Republicons and Clinton, in their economic stupidity, decided that the markets needed to be opened back up to deregulation, unfettered greed, and speculation/market distortion (derivatives, more on that in another blog) that created the first Great Republican Depression.

Glass-Steagall had some beautiful and simple economic principles that can be summed up by describing 4 of its key provisions.

  • One, it prohibited Federal Reserve member banks and deposit-taking banks from purchasing securities established by the moneys of its depositor and also restricted any purchases of said securities up to 10 per cent of its capital and surplus. This provision prevented banks acts that endangered the bank itself, the banking system, and the public at large from high risk activities.
  • Two,  it prohibited a mortgage banks from having interlocking owners/board members, closing officers, or employee relationships with an investment/commercial bank principally engaged’ in securities underwriting and distribution and the inherit risk therein. It established an affiliation divide between mortgage banks and commercial banks.
  • Three, it allowed commercial/investment banks to purchase, float, and sell securities directly, without restriction, solely on the order of and for the account of customers and itself.
  • Four, it did allow for Commercial/investment banks to commence in the act of  underwriting and dealing in securities outside of the United States.

The First National City Bank correctly describes Glass Steagall as being “enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.”

Back in 1999, a Republicon Congress and Clinton passed the GrammLeachBliley Act (GLB) which completely obliterated the protections of Glass-Steagall. It brought into life a previously unknown entity called “derivatives”. This single act reverted our financial institution to a similar make-up of the pre-First Republicon Depression and resulted in even worse results. America’s saving graces were that, in the Second Great Republicon Depression (SGRD) of 2008, we had in place the social safety nets (Medicare, Unemployment Insurance, Social Security, Medicare, and others), a Democratic President, a Democratic Congress, and the FED to dampen some of the potential damage. If it were not for these factors, America would have returned to the bread lines of the early 1930s.

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