Should We Reinstate Glass-Steagall?

The one unmentionable topic that has become the non-barking canine is reinstating the Glass-Steagall Act after we repeal the Gramm-Leach-Bliley Act. Since no one else will say it aloud, I will. Let us re-erect supposedly harsh regulatory lines separating activities between commercial banks and investment banks. Once more, commercial banks may only underwrite government-issued bonds (which should keep them busy for years), thus avoiding the temptation of deposits. The remainder of underwriting securities goes to investment banks.

Before everyone reaches for his or her keyboard, telling me why repealing the Gramm-Leach-Bliley Act, which negated Glass-Steagall, is impractical and is a business-growing impediment, in the 21st century, that is precisely the dash of regulatory perspective we seriously need now.

Financial institutions will forever devote a significant portion of their energy and their cash to figure out ways around regulatory restrictions. It is not the job of domestic authorities to placate the whims and desires of global institutions playing international markets, using docile laws, for fun and profits.The values of international capitalism do not run congruent with the values of domestic capitalism. In addition, domestic capitalism has a lousy track record against international capitalism.

The Obama Administration has giving broad powers to the Federal Reserve to oversee banking, and amorphous money institutions, including increased capital ratios. New ratios, however, are below some international standards.Another byproduct of the reshuffling of regulatory priorities will mix for the first time the oversight of commerce and banking. Nevertheless, the absence of strict divisions between banking business lines is unchanged.

Under the Glass-Steagall Act, when enacted in 1933, regulators protected bank depositors from stock market speculation and other investment banking activities. Over time, we also generated enough wealth to end the Great Depression, create the largest middle-class any nation has experienced in history. We were able profitably expanded the aviation, automobile, and pharmaceutical industries.

Nor did American capitalism neglect the opportunities to make money in entertainment, travel, aerospace, electronics, or telecommunications. The existence of Glass-Steagall did not block private industry from entering, and making individuals rich, from the computer and personal computer areas.Trade and manufacturing benefited greatly through the years with G-S on the books.

Last but not least, the financial industry. As Charlie Sheen’s character, Bud Fox demanded an answer to his question from Michael Douglas’s Oscar-winning portrayal of Gordon Gekko in Oliver Stone’s 1987 Wall Street, “How much is enough?" People in the financial services industry made more money than most other Americans did throughout their careers. Wall Street did ok under Glass-Steagall. What good does it do to kill the golden goose as it increase production of delivering the golden eggs?

We will not go backwards even if it is in our best interest. We culturally frown upon looking backwards. Sometimes it is a virtue while other times it is risky.

Do we like managing risk or do we attempt to manage the risk we like?

It’s the Soil, Not the Green Shoots, that’s Bad

At the risk of being repetitive, if you look at the macro economic data and the upcoming political showdowns over taxing and spending, the markets are justified in listing with a negative bias, as we sail into the future.  Regrettably, this includes a shocking but probable casualty suffered by the U.S. debt obligation’s AAA credit rating, by 2012. 

The massive selloff seen in Wednesday’s Treasury bond market rested on disclosed information communicated throughout the trading day, as well as what was unspoken; that deep down inside, short-term investors and long-term money managers alike do not believe in green shoots sprouting across America. 

Let us review a few macro-economic facts that can poison US green shoots faster than eating the wrong part of a Blowfish in a Sushi bar: 

·         The IRs reported that tax revenues fell by $138 Billion or 34% in April versus a year ago.

·         Some municipalities are contemplating disincorporation in the face of budget shortfalls.

·         Forty-two states are facing at mid-year a $60 billion shortfall for FY 2009.

·         In April 21 states saw unemployment fall, 11 unchanged, 18 states are still experiencing rising unemployment.

·         TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3^rd qtr. of 2008 and the 1^st qtr. of 2009.

·         Consumer debt fell six out of eight months ending in March, which is up .1 per cent, the slowest growth in 17 years.

·         Germany, the world’s largest exporter, economy is growing worse.

·         The Federal Reserve Z1 statistical release shows household wealth fell $.5 trillion in 2007 and $11.8 trillion in 2008.

·         The US will not be able to sell 2 trillion dollars in obligation, for FY 2009, without significantly higher interest rates.

·         Higher interest rates will choke off any recovery and retard growth.

·         The rebound in real estate is an aberrational illusion, which will peter out later this year, when move-up buyers fail to show up this fall. 

I hate being the skunk at the summer picnic; however, to ignore these facts and promote the meme of “less bad is good” is a bit too Orwellian for my sensibilities.  Losses are not equal to profits.  Once you accept the premise that de-leveraging will continue for the next several years, it becomes easier to discern between green shoots and weeds, and what awaits future business trends.  Now is the time to exit most fixed rate debt in exchange for variable rate debt like TIPS. 

What’s more ominous, though, is the unhealthy political climate to correct problems that do require sagacious political solutions and strong political leadership.  The pervasive irrational mindset that the largest industrialize nation’s infrastructure can be had with niggardly taxation defies logic.  Maintenance of our transportation system, our communication system, as well as our public/private healthcare and pension schemes, for too many years was paid for by dubious credit, OPM (other people’s money), or ignored altogether. 

California is an exquisite example of bad politics.  In the name of fiscal discipline and conservatism, California may allow the eighth largest economy in the world to fail, aided perhaps by the Obama administration’s refusal to be involved.  California’s Legislative budget analyst projects a 2009-2010 budget deficit of $28 billion dollars.  Short-term, California is looking for a $15 Billion dollar backstop in guarantees by the feds.  That will help 38.2 million people, or 12.4% of the US population.  California generates 13% of the nation’s GDP.  How many green shoots will that strangle in its infancy? 

If you think that this assessment is too gloomy, 2010 holds its own surprise for doubters of stagflation and global political drama.