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What Happened to the Economy?

June 19th, 2009 · No Comments · Carpinteria Real Estate, Ennisbrook, Hope Ranch Real Estate, Mark Lomas and Kirsten Wolfe, Montecito Real Estate, Property Search, Santa Barbara Real Estate, Santa Barbara Realtors, The Economy, The Real Estate Concierge, The Real Estate Scene

How did we find ourselves in such an economic mess? How could the powers that be not have the foresight to see what was right around the corner? We’ve been led to believe that the sub prime mortgage melt down was the cause, when the truth of the matter is – it’s the derivatives, created by the repeal of the Glass-Steagall Act by a greedy Banking industry.
The Glass-Steagall Act, passed in 1933, mandated the separation of commercial and investment banking in order to protect depositors from the the hazards of risky investment and speculation – the cause of the 1929 Stock Market crash. It worked fine for 50 years until the banking industry began lobbying for its repeal during the 1980s.
The main cheerleader for the repeal was Phil Gramm, but there is plenty of blame to go around here. Both Republican and Democratic Senators and Congressmen supported this disgraceful bow to the banking industry which was eagerly signed into law by Bill Clinton in 1999.
According to Wikipedia, many economist have criticized the repeal of the Glass-Steagal Act as contributing to the current economic volatility in the Stock Market. The banking industy laid out more the 200 million dollars for lobbying in 1998 according to the Center for Responsive Politics. The banking industry succeeded in their two decades long effort to repeal the act. This lust for banking largesse is as wanton among Democrats as Republicans – right up to the current campaign, according to the Phoenix Business Journal. Both McCain and Obama have accepted substantial amounts of money from Wall Street bankers, investment and securities firms, and their executives during this campaign cycle.
Personally, I believe the Glass-Steagall Act needs to be re-enacted. Before we bail out the banking industry, insurance firms, and Wall Street some reforms and regulations need to be put into place or the game will just continue.
The American International Group – AIG – upon receiving $85 Billion Dollars from the government recently sent executives to a $440,000 retreat at a posh California resort? Where’s the oversight? How many times can the taxpayer’s trust be betrayed before someone steps in and does something? Congress seems to only act in times of crisis… is anyone listening?!
Late in the game our government realized what had to be saved was not the housing market or the dollar, but the financial derivitives industry: and the precepice from which it had to be saved was an “event of default” that could collapse a quadrillion dollar derivatives bubble, a bubble that could take the entire global banking system down with it.
Right now derivatives represent the biggest financial market in the world. Derivitives are financial instruments that have no intrinsic value, basically they’re just bets. “The point everyone misses” wrote economist Robert Chapman a decade ago,”is that buying derivatives is not investing. It’s gambling, insurance and high stakes bookmaking. Derivatives create nothing and they serve to enrich non producers at the expense of the people who do create real goods and services.” As bets, you can hedge your bet that something will go up by placing a side bet that it will go down. Hedge funds hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

What to do? Re-enact the Glass-Steagall Act for starters. Separate commercial banking from the stock market. Then, have Congress focus on the Dirivatives Bubble and articulate a solution, simply and clearly. Steve Krofts on 60 Minutes last week did a great job of explaining what’s happening. Where’s the political discourse?
Just my opinion.

Some of the information for this post was gathered from Wikipedia, William Kaufman’s “Shattering the Glass – Steagall Act”, the Phoenix Business Journal, and Ellen Brown’s post on her blog (Web of Debt) It’s the Derivatives Stupid!

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