For more than fifty years following the crash of 1929 Glass-Steagall served as a dike against the ravages of excessive speculation in the financial markets. This set of graphs gives a good visual presentation of the inverted pyramid (Ponzi) effect that deregulation has had on capital markets since the late 1970s:

• 1978, Marquette vs. First of Omaha—allowed banks to export their state usury laws nation-wide, setting off a wave of deregulation as states competed for banking business; resulted in complete elimination of usury rate ceilings in most states
• 1980, Depository Institutions Deregulation and Monetary Control At—more than doubled the level of deposit insurance, while at the same time, completely phasing out interest rate ceilings on deposit accounts
• 1982, Garn-St. Germain Depository Institutions Act—deregulated thrifts almost entirely allowing them to get into commercial lending

1987—As a result of mounting S&L failures following earlier deregulation, the FSLIC deposit insurance fund is declared insolvent and must be bailed out by the government

• 1989, Financial Institutions Reform and Recovery Act—creates the Resolution Trust Corp to resolve failed thrifts
• 1994, Riegle-Neal Interstate Banking and Branching Efficiency Act—eliminated restrictions on interstate banking and branching
• 1996, Fed reinterprets Glass-Steagall—allowed bank holding companies to increase investment banking activities to 25% of revenues

1998—As a result of deregulation having removed all the barriers, Citicorp and Travelers are allowed  to merge and combine their commercial banking, insurance, and investment activities—the stage is set for some really bad behavior

• 1999, Gramm-Leach-Bliley Act—repealed Glass-Steagall all together
•  2000, Commodity Futures Act—the Act  prevents regulation of most OTC derivative contracts, including credit default swaps; growth in derivatives skyrocket

2004—SEC introduces voluntary (???) industry regulation allowing investment banks to hold less capital reserves and increase leverage

2007—Subprime Mortgage Crisis sends shockwaves through the entire financial system

• 2007, Term Auction Facility—Fed sets up a special liquidity facility, that unlike the discount window, makes loans with no public disclosure

2008—Bear Stearns Collapse is a harbinger of worse to come

• 2008, Primary Dealer Facilities—Fed opens the discount window to investment banks accepting a broad range of questionable asset-backed securities as collateral
• 2008, Housing and Economic Recovery Act—props up new subprime borrowers with Federal guarantees

2008—Fannie Mae and Freddie Mac go into conservatorship

2008—Lehman Brothers Collapses

• 2008, Emergency Economic Stabilization Act—increases deposit insurance to $200,000; authorizes Treasury to purchase distressed mortgage-backed securities; injects capital into the banking system
• 2008, Money Market Liquidity Facilities—Fed facilitates purchase of various money market instruments
• 2009, Public-Private Investment Program—Fed subsidizes purchase of toxic assets with government guarantees

…and the beat goes on…

Market Pyramid Composite

It’s still a work in progress.

http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

One of my CFO colleagues from Oracle days was railing the other day about the Federal Reserve, vilifying them for causing most of the current economic crisis. Before we start pulling down any of our current institutions in a major paradigm shift, it’s important to understand why they’re there in the first place. This speech by Alan Greenspan given before The American Enterprise Institute for Public Policy Research on Dec 5th, 1996 is still one of the best historic and current day perspectives I’ve seen on the subject; it gives a good historical context for central banking issues. Please have a read and comment with your thoughts.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/12/03/MN8I1M7LAV.DTL

The news articles that I draw your attention to on a daily basis are intended to show the breadth and depth of our problems (how badly broken the system is) and are bookmarks that we’ll come back to later when we get into the serious paradigm re-engineering discussions on things our new paradigm must structurally address. Just read for now…we’ll connect the dots later. This article illustrates one of the many strategies being pursued by big oil companies to keep fuel prices high to rake in record profits, at the expense of every other segment of our economy. Energy, which the nation depends upon across all sectors, should not be subjected to the wild gyrations of Wall Street speculation. It’s one of several industries that we need to pull off the table and manage for social profit (an idea we’ll explore further) instead of corporate profit.

http://www.nytimes.com/2011/11/29/business/global/daily-stock-market-activity.html?sq=shares soar on talk of a europe deal&st=cse&adxnnl=1&scp=1&adxnnlx=1322860717-60QZtvCNfqHAFYmP1CKDJw

http://www.nytimes.com/2011/12/01/business/daily-stock-market-activity.html?scp=1&sq=stocks%20soar%20on%20central%20banks’%20move:&st=Search

I don’t know about you, but it drives me nuts…the daily whip-saw of our capital markets…up today, down tomorrow, up again two days later…a few street insiders earning billions in a day, the rest of us losing those same billions. The periodicity of these dramatic swings three decades ago might have been a few times a year, then they became monthly, then weekly, now it’s almost daily or even hourly. The markets for most of us have become totally unpredictable (hint: unless you control the program code). And the trailing headlines for why the markets were up or down…do those explanations really make sense to anyone, especially when you consider them in the context of a period of time longer than one day or one week? One day the markets will be tepid or down on good news, but can also be up on what would normally be bad news. We are given the excuses in the headlines for trailing market behavior but don’t seem to get to root causes that make any sense. I don’t think most analysts have a clue, they’re engaged in the same chase as the rest of us, high from breathing Wall Street’s exhaust fumes. But they have to feed us something to keep us coming back, so they just pull together whatever trailing news they can find as the ‘explanation’ for market performance on any particular day…doesn’t matter if it’s rational or not, after all, who can really explain investor behavior…it’s irrational…or so we’re told.

So…what’s really going on. For Wall Street insiders to make money, they need price movement…up or down, they don’t care…they just need movement. These daily whip-saw events are being driven by computerized trading routines that have investors racing back and forth like schools of fish chasing rays of sunlight. And the Wall Street corporations who developed and control those computer trading routines have their nets in the water harvesting our hard earned investment dollars into their own coffers. The increasing periodicity of these whip-saw market conditions (and resulting public ‘haircuts’)  is driven by the need for Wall Street insiders to forever expand and accelerate their income flows…real-time greed, pure and simple. It’s time to end their party.

You can visit http://en.wikipedia.org/wiki/Program_trading and other links for a more detailed treatment, but here’s a high-level summary of the situation: Technology advances over the past two decades have led to an explosion in program trading by large institutions like Goldman Sachs, automated routines that arbitrage temporary price discrepancies between related financial instruments across different markets that have now been networked together electronically. These transactions have no economic value and are executed by predetermined algorithms purely on temporary pricing relationships—typically timing discrepancies—and now make up more than 30% of the daily trading volume (it’s been over 40% on some days). There is no rational analysis of breaking news or the underlying company’s financial performance associated with this trading activity; they’re simply trimming the hairs that stick out momentarily from the fabric of Wall Street, siphoning off huge amounts of cash from the investment pool on a daily basis. Here are just a few of the problems associated with this activity: 1) the automated trimming process is circular—the more you trim, the more you cause other hairs to pop out momentarily, 2) program trading removes vast sums of money from the ‘true’ working economy and represents one of the worse forms of obscene profiteering.

If we’re going to fix the problem, we would need to unplug all the computerized trading routines that cause these price movements and generate obscene profits for a few while causing massive financial damage to the economy at large…and SLOW EVERYTHING DOWN…to a simmer instead of this constant boil. Most of the record profits recorded by Goldman Sachs in the second quarter of 2009 were attributed to program trading. We need to see if we can also claw back some of that money into the working economy.

http://dealbook.nytimes.com/2011/11/28/atts-11th-hour-plan-to-save-its-deal-with-t-mobile/?scp=2&sq=andrew%20ross%20sorkin&st=cse

The news articles that I draw your attention to on a daily basis are intended to show the breadth and depth of our problems (how badly broken the system is) and are bookmarks that we’ll come back to later when we get into the serious paradigm re-engineering discussions on things our new paradigm must structurally address. Just read for now…we’ll connect the dots later. This article illustrates how big corporations game our current system and steamroll the safeguards that are intended to protect public interests.

http://www.nytimes.com/2011/11/29/us/as-public-sector-sheds-jobs-black-americans-are-hit-hard.html?scp=1&sq=Public%20Sector%20Sheds%20Jobs:%20Blacks%20Are%20Hit%20Hardest&st=cse

The news articles that I draw your attention to on a daily basis are intended to show the breadth and depth of our problems (how badly broken the system is) and are bookmarks that we’ll come back to later when we get into the serious paradigm re-engineering discussions on things our new paradigm must structurally address. Just read for now…we’ll connect the dots later. The paradox underlying this article that we’ll need to address are the large swaths of Americans being squeezed out of the middle class by the reduction in federal budgets (desired outcome) and the resulting elimination of public sector jobs (undesired out come) that these Americans have come to depend upon.

http://www.nytimes.com/2011/12/03/business/few-avenues-for-justice-in-the-citi-case.html?_r=1&scp=1&sq=few%20avenues%20for%20justice%20in%20the%20case%20against%20citi&st=cse

http://www.nytimes.com/2011/11/29/business/judge-rejects-sec-accord-with-citi.html?scp=1&sq=Judge%20Rejects%20An%20S.E.C.%20Deal%20With%20Citigroup&st=cse

The news articles that I draw your attention to on a daily basis are intended to show the breadth and depth of our problems (how badly broken the system is) and are bookmarks that we’ll come back to later when we get into the serious paradigm re-engineering discussions on things our new paradigm must structurally address. Just read for now…we’ll connect the dots later. This article illustrates how the ‘too big to fail’ financial corporations have co-oped the federal agencies charged with safeguarding public interests

http://www.nytimes.com/2011/11/29/business/businesses-scramble-as-credit-tightens-in-europe.html?pagewanted=all

The news articles that I draw your attention to on a daily basis are intended to show the breadth and depth of our problems (how badly broken the system is) and are bookmarks that we’ll come back to later when we get into the serious paradigm re-engineering discussions on things our new paradigm must structurally address. Just read for now…we’ll connect the dots later.