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Time to Reinstitute Glass-Steagall

Posted by Larry Doyle on December 3, 2009 3:16 PM |

A car needs gas to run. An engine needs steam. A factory needs power. The fact is without a steady source of energy nothing can operate. Welcome to the Uncle Sam economy circa 2009.

You may be thinking, wait a second LD . . . the Federal Reserve is flushing the system with liquidity. Money is easy and it is propping the markets. While availability of credit may be tight, the demand for credit is also weak. So what am I talking about?

Thanks to RM for providing the FDIC Third Quarter 2009 Banking Profile (a link to the full document is provided at the end of this commentary). For those who care to rip apart the inner workings of our banking system, this report is the owner’s manual. The report highlights the following:

> Industry Posts Net Profit of $2.8 Billion
> Increased Revenues, Lower Securities Losses Offset Higher Loan-Loss Provisions
> Net Interest Margins Improve at Most Institutions
> Troubled Loans Continue to Rise, But Rate of Growth Slows
> Loan balances Decline by 2.8% in the Quarter

Based on this overview, it would appear that the banking industry is slowly recovering. In aggregate, perhaps that may be the case. But what doesn’t this report tell us?

This report does not highlight the massive disintermediation that has occurred within the community banking industry in our country. Why has this occurred and to what extent has it occurred?

Uncle Sam is very clearly backstopping the largest institutions given their status as ‘too big to fail.’ With Uncle Sam’s support, core deposits have been withdrawn – that is disintermediated – from the smaller institutions to the largest institutions.

In the course of a discussion with a banking executive this afternoon, this longstanding veteran apprised me that the domestic FDIC-insured banking industry has a total balance sheet of approximately $13 trillion. Prior to this crisis, the balance sheets of the four largest institutions accounted for approximately 25% of the total banking industry’s balance sheet. What is that figure now? Approximately 65%!!

The too big to fail is now 250% bigger. The money has poured into these institutions given Uncle Sam’s backstop. Meanwhile, money has fled the small regional and community banks and left the local economies without credit.

No credit. No source of fuel. No growth. No jobs.

What might Washington think about doing? Time to break up the oligopoly in the large money center banks. How might that be done? Reinstitute Glass-Steagall.

What do you think?


For those interested in reviewing the entire FDIC Report, please click on the image to access the pdf document:

  • fiscalliberal

    It looks like Bernanke is going to be reconfirmed. This historical compendium of Bernanke comments starting 2005 provides some perspective of why we are in the trouble we are in. titled “Why are we listening to this guy”

    Recall he was appointed in 2006 and his academic concentration was the first depression. Yet he did not see the impact of Glass Steagle repeal or the SEC relaxation of capital reserves in 2004,

    My conclusion is that he did not understand the problem or was chear leading, neither scenario serves us very well.

  • Larry Doyle

    The Fed is no more an independent entity than any other bank. I think Bernanke has a full and total understanding of all the issues but your points are very well taken. Where was the Fed in general and Greenspan and Bernanke in particular when those situations were developing.

    It’s not so much pricking bubbles but the Fed is charged with regulation as well. It did not perform.

  • HaroldD

    You and many others seem intent on pulling punches against the status quo, no doubt due to your proximity and associations with it.

    Being on the left coast and out of the “in’ group, I don’t suffer that handicap.

    Bernanke is a stooge. The Fed is a criminal organization little different than the mafia. It does the bidding of the financial elites. Obama is a puppet of the elites.

    Dance puppet!

    Your blog about markets is largely superficial seeing as our predicament and solutions are no longer financial/economic based. They are politically based.

    REVOLT! Bring back the Guillotine!

  • Mike

    We need more sites like these to get people informed.

    How can people change what they don’t understand? Americans aren’t bred to be intelligent and informed citizens. We’re bred to be consumers. Consumers who are just smart enough to know how to perform labor, but not smart enough to question or be concerned with the inner workings of our government and it’s relationship with major corporations.

    Soon our history books will be sponsored (and rewritten accordingly) by corporations.

    However, now that the age of the consumer is coming to an end and preparations are being made for our currencies funeral, I hope people will start waking up.

  • coe

    LD – I would disagree a bit with your observation that money has fled the regionals for the “too big to fail” set. I actually believe that deposits have grown systemically, including very much so at the regional and community levels. The flip side, though, is that these banks are not lending so they are sitting on a pile of liquidity (saving it, in essence, for a rainy day), and they are certainly not lending enough – whether because of lack of demand, and/or because of concerns about legacy balance sheet risks, downside economic risks we are yet to face, and/or an unwillingness (self-imposed or regulatory driven) to chase bad credit opportunities yet again. There is no doubt we are in the midst of battling a fundamental conundrum. Logic tells you the industry could/should continue to consolidate – economies of scale, service, costs etc, yet this phenomenon must result in fewer behemoths that trip the “too big to fail” meter. I agree that regulatory and legislative reform is desperately called for, including perhaps a rollback of Glass-Steagall in some form, but it is awfully tough to put the genie back in the bottle – especially so in this fractious political and economic climate where there is a woeful lack of leadership and no lack of special interests represented at the table. Doesn’t mean we shouldn’t try – but I’m a skeptic – I may have been born at night, but not last night!

  • Lance

    Bring back Glass Steagall!!!!!!!!!!!!!

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