Financial experts, Congress, the President and other advisors are all running around trying to figure out what happened and how to fix it. They talk of $700 billion plans to buy bad mortgages from banks to free them up to make more profitable loans. But before they throw good money after bad everyone needs to take a step back. Since so many people say this is the worst financial crisis since the Great Depression then that is where we need to start.
A major component of the Great Depression was bank failures. Simply put, bank failures were partly due to bank’s using their customer’s deposits to buy and sell stocks and risky securities, in other words to act as investment banks. To prevent this from happening Congress passed The Banking Act of 1933 which included the Glass-Steagall Act. This act said that the only deposit accounts banks could offer were Checking, CDs or Savings accounts. The government even regulated what interest rates a bank could offer on CDs and Savings. As for buying or selling stocks or securities you had to go to an investment back. Overall, these laws clearly defined a distinct line separating commercial banks from investment banks.
In the early 1980’s investment banks were the first to cross the Glass-Steagall line when they started to offer Money Market Accounts. Even though investment bank’s Money Market Accounts were not insured, as were bank deposit accounts, they offered very high interest rates. People were moving their money from commercial banks to investment banks and so to remain competitive, Congress began to deregulate banks and overturn The Banking Act of 1933.
The Depository Institutions Deregulation and Monetary Control Act of 1980 paved the way for banks to offer checking with interest and eliminate the interest cap on CDs and Savings. This was followed by more deregulation which allowed banks to merge in their state and granted new powers to Savings and Loans.
The law that impacted Savings and Loans the most was the Garn-St Germain Act of 1982. This act allowed S&L’s to have up to 50% of assets in commercial real estate. This meant that Saving’s and Loans went on a binge of making loans with little regard if the person or business could pay them back. Within a few years Savings and Loans were failing throughout the country. In 1989 the government created the Resolution Trust Corporation (RTC) which was to oversee the S&L failures and funded it with $50 billion. Over the next few years another $50 billion was given to the RTC. In 1980 there were 4,000 S&L’s and today there are only 1,250.
Congress continued to deregulate banks and the last of the Glass Steagall Act from 1933 which separated commercial banks from investment banks was abolished with the Gramm-Leach Bliley Act of 1999. Commercial banks could now do everything an investment bank could do such as underwrite and sell insurance and securities.
The financial world looks much different today than it did before the deregulation of the 1980’s. Savings and Loans are few and far between and now investment banks are gone, too. For the most part, that leaves just commercial banks to handle all of our daily transactions, savings, mortgages, consumer and commercial loans and now even our retirement funds. And with the deregulation of interstate banking, the number of commercial banks has dropped tremendously.
While everyone discusses the $700 bailout of investment banks somebody better be keeping an eye on the remaining banks. If they go then we have no where else to go. Our best hope for the future lies not in the huge conglomerates but in the small local banks. They might not be sophisticated but they still believe in serving their customers and in an old fashioned fiscal conservatism. And maybe the big financial institutions and Congress can learn from them.
A major component of the Great Depression was bank failures. Simply put, bank failures were partly due to bank’s using their customer’s deposits to buy and sell stocks and risky securities, in other words to act as investment banks. To prevent this from happening Congress passed The Banking Act of 1933 which included the Glass-Steagall Act. This act said that the only deposit accounts banks could offer were Checking, CDs or Savings accounts. The government even regulated what interest rates a bank could offer on CDs and Savings. As for buying or selling stocks or securities you had to go to an investment back. Overall, these laws clearly defined a distinct line separating commercial banks from investment banks.In the early 1980’s investment banks were the first to cross the Glass-Steagall line when they started to offer Money Market Accounts. Even though investment bank’s Money Market Accounts were not insured, as were bank deposit accounts, they offered very high interest rates. People were moving their money from commercial banks to investment banks and so to remain competitive, Congress began to deregulate banks and overturn The Banking Act of 1933.
The Depository Institutions Deregulation and Monetary Control Act of 1980 paved the way for banks to offer checking with interest and eliminate the interest cap on CDs and Savings. This was followed by more deregulation which allowed banks to merge in their state and granted new powers to Savings and Loans.
The law that impacted Savings and Loans the most was the Garn-St Germain Act of 1982. This act allowed S&L’s to have up to 50% of assets in commercial real estate. This meant that Saving’s and Loans went on a binge of making loans with little regard if the person or business could pay them back. Within a few years Savings and Loans were failing throughout the country. In 1989 the government created the Resolution Trust Corporation (RTC) which was to oversee the S&L failures and funded it with $50 billion. Over the next few years another $50 billion was given to the RTC. In 1980 there were 4,000 S&L’s and today there are only 1,250.
Congress continued to deregulate banks and the last of the Glass Steagall Act from 1933 which separated commercial banks from investment banks was abolished with the Gramm-Leach Bliley Act of 1999. Commercial banks could now do everything an investment bank could do such as underwrite and sell insurance and securities.
The financial world looks much different today than it did before the deregulation of the 1980’s. Savings and Loans are few and far between and now investment banks are gone, too. For the most part, that leaves just commercial banks to handle all of our daily transactions, savings, mortgages, consumer and commercial loans and now even our retirement funds. And with the deregulation of interstate banking, the number of commercial banks has dropped tremendously.
While everyone discusses the $700 bailout of investment banks somebody better be keeping an eye on the remaining banks. If they go then we have no where else to go. Our best hope for the future lies not in the huge conglomerates but in the small local banks. They might not be sophisticated but they still believe in serving their customers and in an old fashioned fiscal conservatism. And maybe the big financial institutions and Congress can learn from them.
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