Monday, 12 September 2011

Glass and Stegal

After world war two wise senators set about to prevent the economic instability which has blighted the American economy and which had made any reconstruction of German impossible and thus has sped up the Second World War.

They sought to separate out the consumer banks (those which provide our loans and accounts) from those they called casino capitalist, the short sellers and share dealers. Indeed they very correctly argued that loaning people money to “invest” in short term share gain causes share bubbles and very shortly afterward cause share crashes leading to massive economic conflagrations; which in turn led to social disharmony and occasionally war.

It is a pleasing accident of history that the names of these two senators so closely parallel the era of glass and steal towers which there division brought in. For as Capitalism can benefit from war, it is true to say it flourishes under stability.

Glass and Stegal stood as long as the Keynesian economic model was dominate; as long as government direction of macroeconomic policy was widely accepted, however, in the 1970 this dominance ended. Western material economic progress ran to a halt and western economies were left becalmed by stagflation and the “red menace” was still on its relentless march.

So the opponents of Keynesian grew stronger and strong and as they gained more and more influence, they slowly very slowly dismantled the protections offered by glass and stegal. They in short followed Marx’s prediction that capitalism can bear not limits and sought to remove all limits to its own free movement and one of those targets was the glass Stegal act.

It was not difficult to erode the boundaries, it was always odd that a companies which owned both retail banking division and higher risk divisions (and they all did) would operate without collusion between the two parts of it. Unless you disallow any connection between the two parts it is invertible, regardless of regulatory bodies that the organisations will erode these boundaries internally; even with a total division the economic interest of the high risk bankers would be to buy out the retails banks, so they can better flog their products and gain accesses to their funds.

I have no issue with the banking reforms, its seems wholly prudent to me to separate out retail baking from higher risk financial services, however, unless it is international it will fail, unless it is total it will fail; even then it will fail. Not because it is a bad idea but because it is an obscure limit on capitalism which the majority will never concern themselves with in the good times and only partially care about in the bad.