The Gramm-Leach-Biley Act, the most disastrous economic act of the 20th century

The Crash of 2008 was not caused by irrational exuberance, as Alan Greenspan euphemistically put it, but by greed, cunning and ambition, held in check since 1935 by the Glass-Steagall Act, which was unleashed when President Bill Clinton signed the Gramm-Leach-Biley Act of 1999.

It was not gold in them thar hills the fortune hunters were seeking, but short run contrived unsustainable profit from shaky loans of all sorts, speculating and gambling, leading to a mother lode of outlandish personal bonuses.

I talked with a banker who got out before the 2008 crash who had put all his bonus money in gold, real gold, several million dollars worth, which he said you could carry around in a five gallon bucket. Why did he do it? He said, “Who wants a pile of worthless paper money.”

The Glass-Steagall Act confined bored, genteel, staid bankers to taking deposits and loaning them out to customers to make money the old fashioned way; the Gramm-Leach-Biley Act set bankers free to also buy and sell stock in stock markets using the bank’s money, sell credit instruments in market transactions, and, most disastrously, gamble with derivatives, including a new “commodity”, credit default swaps, which ultimately put at risk not only the money of depositors but US taxpayers.

The primary culprits were the big banks, the so-called money center banks, directed and supposedly controlled from office suites atop skyscrapers in New York City, the too big to fail banks.

Here is a quote from the last edition of my book, Business Voyages, page 705, written in January 2008, published in 2011:

“The United States Congress and the Clinton administration repealing in 1999 the Glass-Steagall Act, or the Banking Act of 1935, that created banking reforms to regulate the US banking system and deal with financial problems of the Great Depression was probably a bad idea, and a new version of this act should probably be reenacted in several countries with more regulation of the global banking system, including regulation of credit default swaps which are rumored to involve some $45 trillion of contracts around the globe, which could be the biggest threat of all. Credit default swaps and derivatives are now unregulated and entail high rollers making deals with one another to protect their debt from default but no one knows who has promised how much to or for whom or whether most of the so-called counterparties to the trades have the ability to perform if a major meltdown occurs. Credit default swaps and derivative contracts, which did not exist until a few years ago, may have created an illusion of safety that encouraged high rollers to make riskier and riskier bets using more and more leverage. Unwatched fat cats tend to get fatter and when a fat cat is busy smoking big cigars or playing golf or bridge the mice will also play.”

Well, here we are five years later, and there isn’t any “probably” to it; something needs to be done before we implode again. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 allows big banks to keep on doing pretty much what they had been doing, while creating hundreds of pages of rules presuming to make them do the right thing in specific cases, creating minutiae and legalese few people can apply with certainty to particular cases.

All Congress had to do after 2008 was tell banks in a new law from now on all you can do is take in deposits and loan money, as in the Glass-Steagall days. But no, our hopeless bought and paid for narcissistic congress people did not do that, and the fat cats and mice are still playing, still buying and selling stock, still buying and selling derivatives.

The notional value of derivatives trades around Earth is now about $600 trillion, notional value being the total value of contracts, not the value of assets that form the basis for the contracts. These gamblers are not taking all these bets to hedge against unavoidable risks; they are gambling in many cases as if gambling on a horse race, with other people’s money, to hopefully hit the jackpot with a big bonus.

Bring back Glass-Steagall ASAP.

For background reading, see “High Church Hustle: CNBC’s Televangelists,” by Jason Linkins, in The Baffler, No. 21, 2012, published by The MIT Press.

Richard John Stapleton is an emeritus professor of business policy, ethics and entrepreneurship who writes on business and politics at effeactivelearning.net. He is the author of “Business Voyages: Mental Maps, Scripts, Schemata and Tools for Co-Constructing Your Own Business Worlds.”