On Monday in an interview for Bloomberg President Donald Trump announced that he and his team are considering reviving the famous Glass-Steagall act. This move will effectively break up commercial from investment banks and will bring stability back to the sector.
What is the Glass-Steagall act?
In the past commercial and investment banks were separated entities. The key feature which distinguishes commercial banks from any other type of financial institution is that a commercial bank must have a banking license. This permits them to accept deposits from the public. The price of being allowed to accept deposits is that banks must subject themselves to stricter regulations.
Today however, after the Gramm-Leach-Bliley act was passed in 1999, by then President Clinton (The Clinton clan fucking up the country since the 90s) commercial and investment banks have mostly merged and formed “complex financial institutions”, as they’re known by the regulators.
What went wrong?
This has enables securitization process and banks have change their business models. 30 years ago if you wanted to obtain a mortgage for your house, the lender expected you to pay them back. Since the development of securitization however, people who make the loan are no longer in danger if there is a risk it to be repaid. In the old system, when a homeowner paid their mortgage every month, the money went to the local lender. So the lenders were very careful who they gave money to. In the new system lenders sold the mortgages to investment banks, who then packaged them into what’s called a CDO(collateralized debt obligation) with other loans (credit card debt, car loans etc.) and sold them to investors. So now, when the person who obtained the loan paid his monthly instalments, the money didn’t go to the bank that gave them the loan in the first place – they went to investors from all over the world. Therefore, now, the person who gave the loan, didn’t bare the risk of that transaction. It’s not surprising how moral hazard can occur out of this situation. And that is exactly what happened, the banks gave mortgage loans to virtually anybody, these people later defaulted on their loans and the bubble burst. So it’s understandable how the public lost confidence in the financial institutions.
It comes as no surprise that Donald Trump wants to break up big banks, really. They are the main cause for the last financial crisis and the bubble that is being formed right now (hyperlink here). If Trump goes to proceed with this he will definitely make a step in the right direction in Making America Great Again. Not to mention how many people already want to impeach him and if he is to survive he must make sure that the next recession hits after his term ends. He already knows that there are massive bubbles in 5 or 6 different sectors and it’s only a matter of time before these bubbles burst.