Diagnosis for Democracy
Insights into the State of Our Union
A Blog by Rob Tenery, MD


Economic Globalism May Be Setting Us Up for the Big Fall

By Rob Tenery, MD on September 28, 2016

Following the stock market crash of 1929, Congress passed the Glass-Steagall legislation in 1933 that would keep separate commercial banks from investment firms. The purpose was to keep the Main Street depositors and lenders distanced from the uncertainties of Wall Street. The banks held the depositor’s money in trust. Since these depositors were federally insured, their risk was small to nil. Wanting to make more money, the banks began merging with investment firms and the risks started to escelate.

During the Carter administration in 1977, the passage of the Community Reinvestment Act (CRA) began a pushback on the financial constraints outlined by Glass-Steagall. Finding more loopholes around the legislation, this slow deregulation process continued throughout the administrations of Reagan, George H. Bush, and Clinton. By the time Clinton signed the Financial Services Modernization Act also known as Gramm-Leach-Bailey in 1999, Glass- Steagall was virtually ‘toothless’.

The impetus to loosen the bonds of Glass-Steagall did not just come from the banking and business communities. There was also pressure from the political community that represented those on the lower income scale to obtain affordable housing. In 2002, a study by Kathleen C. Engel, a professor of law at Suffolk University, and Patricia A. McCoy, a professor of law at the University of Connecticut law school, noted that banks could receive CRA credit by lending and brokering loans in lower-income areas that would be considered a risk for ordinary lending practices. They also noted that CRA regulations, as then administered and carried out by Fannie Mae and Freddie Mac, did not penalize banks that engaged in these riskier lending practices. The law professors recommended that the federal agencies use the CRA to sanction behavior that either directly or indirectly increased predatory lending practices by lowering these banks’ CRA rating.

In the 1950s, the banking industry was suffering from the doldrums of just making secured loans and dabbling in the bond market. Desiring to expand into more rewarding areas of creating and building businesses that produced domestic wealth, commercial banks turned to business for more deposits. Since the standing rule that only 10% of the bank’s income could come from securities, the business leaders turned to politics. They began to court and elect officials who were sympathetic to their cause, and visa versa, as Main Street interests assumed more control of what was coming out of Washington, DC. Upheld by the courts, banking regulators began issuing interpretations of Glass-Steagall that allowed the banks and their affiliates to participate in an increased variety and amount of security investments.

This became the origin of the slow-motion explosion of investment banking…This is also the ultimate fork where economic globalism began overtaking economic nationalism.1

Banks began making much more money from their investment divisions by issuing paper financial transactions, not necessarily tied to actual assets. Collateralized debt obligations (CDOs) flourished, raising trillions of paper dollars. These particular securities, or derivatives were priced based on their cumulative assets. The CDOs promised to pay investors based on cash flow derived from variable securities with in a particular unit.  Originally, they were developed for corporate debt markets, but evolved to include the mortgage and mortgaged-backed security markets. In the early 2000s these securities were diversified, but as the CDO market grew, the collateral to back up the cash flow became dominated not only by loans, but lower level cash flow securities, such as non-prime mortgages, called ‘synthetic’ CDOs. These CDOs, comprised of nonprime mortgages, are blamed for the recession of 2008.

Because of Wall Street’s deeper pockets, the politicians gravitated away from Main Street’s needs of benefitting the average American that exists in the ‘real’ economy.  Even though the recession of 2008 is behind us, the ‘false’ or paper economy that created the recession is not. With no to little real property, capital or tangible assets, the Wall Street economy, eventually trumps the Main Street economy.

To the young, pseudo-intellectual, educated in the last thirty years, this is all they know. For those who are older and supposed to be wiser are “financially dependent on retention of this new global narrative… These are the willfully blind who have sold-out to the benefit of, and enrichment from, the ‘false’ economy”.2

Based on an economy of only predictions and promises, with no or little property, capital and tangible assets as collateral, the recession of 2008 may just be a ‘warm-up’ for the real thing in this new world of economic globalism.

1)   http://www.poliyifact.com/truth-o-meter/statements/2015/aug19/bill-clinton/bill-clinton-glass-steagall-had-nothing-do-financi/

2)   https://theconservativetreehouse.com/2016/09/06/donald-trump-discusses-the-false-economy/#more-121203





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