To no one’s surprise, Wall Street wins again on legislation. Every major market disaster has been preceded by a loosening of regulation. Once the market plunders, calls for regulation come back. Humans are reactionary, rather than preventative. Decades of asset price inflation lead to bubbles that crash and burn. Politicians vow to never let such disasters happen again and call for strict regulation, but it’s always after the fact. The Great Depression, which is very much like the current time period, was preceded by a debt binge that blew up. The bankers who led the credit barrage got out just fine while accumulating assets for pennies on the dollar. The stock market crash in 1929 led to Glass-Steagall in 1933, which separated investment banks from standard commercial banks.
Glass-Steagall was repealed in 1999 with the Gramm-Leach-Bliley Act, or the Financial Modernization Act of 1999. Run-of-the-mill recessions caused a rethink in regulation. Gramm-Leach repealed section 20 and 32 of Glass-Steagall. Investment banks and commercial banks were close together once again. Deregulation led to chaos in the way of the Dotcom bubble and the 2008 crisis. Risky loans were allowed, and derivatives nearly crashed everything. It’s taken many years of unconventional policies to keep the system afloat. Unconventional is now conventional, which should scare everyone to death. Dodd-Frank has done nothing, as global debt has piled up and risk is as high as ever. This clip from Barney Frank should tell you everything you need to know.
The Volcker Rule first established during the crisis as part of Dodd-Frank put handcuffs on the banks. Now the Volcker Rule will be loosened to help the banks. It reduces limits that are held by banks and allows excessive risk with taxpayer funding. I argue that the 2008 financial crisis had nothing to do with a recession. Most financial people like to say that it was a recession, but it had to do with risk. Speculation and human greed led to a near collapse of the banking system. It would have been awful, but the banks needed to collapse. Systematic risk was the problem and asystematic deleveraging was a solution. Regulation is designed to reign in the speculative actions and prevent another 2008. The law originally stated that any positions held for under 60 days were speculative. This created issues for banking supervisors, as determining what the data meant was difficult.
In 2018, the Trump administration aimed to clean this up by proposing limits on gains and losses so that if the position stayed within certain ranges, they assumed it was just market-making. The rule subjected banks to all financial instruments that could be traded actively. A little provision slipped through the cracks, which stated only “trading” counted. According to the FDIC, by slipping this “trading” term into the legal jargon, it excluded roughly $600 billion of other speculative bets that the bill originally covered. Banks can now trade with their own money on behalf of clients. By weakening this provision, risk-taking can migrate to other places where regulators are not looking. The Federal Reserve and CFTC have not approved this yet. This decision should not be approved, as it would do what has already been done: force main street to bail out Wall Street again. No one went to jail, risk-taking promulgates crises, and the cycle repeats. Wall Street has ruined free markets, and I am afraid no legislators will step up to the plate to halt risky behavior. Maybe our only shot is cryptography?
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