The Danger No One is Talking About

In terms of national financial safety, we have come far since the banking crisis of 1933. The crisis unfolding this week is fixable, at least in terms of the full faith and credit of the Federal Government using the Federal Reserve and Treasury balance sheets to liquify the financial systems by injecting heretofore unknown massive amounts of dollars, while liquidating the shareholders of the affected investment banks and the insurance-financial behemoth, AIG.

I think that it is remarkable that whereas we had 5 investment banks only a few months ago (Bear Sterns, Lehman Brothers, Morgan Stanley, Merrill Lynch, and Goldman Sachs), we enter next week with only two. Curiously, we seem to be looking more like the United States in 1929, in terms of banking: virtually all are commercial (depository) banks now, which do stock brokering on the side. The Glass-Steagall Act of 1933 was designed to divide commercial banks from brokerage houses, so that bank tellers would not sell stock to customers, because this was thought to be a major factor in the banking crisis of 1933: the people made runs on the banks because they did not trust them anymore. Repealed by President Bill Clinton in 1989, the Act was no longer considered applicable.

Now, we must admit that it is probably a great thing to be rid of large financial monsters that were so lightly regulated. Having lax requirements for collateral-on-hand leads to playing fast and loose with other people's money. Perhaps, however, it would have been prudent to institute the enhanced regulation well before the present mess, and save the investment banks.

For those who say that the last thing we need is more federal regulation in this or any area, I would usually agree, but would merely point out that had the federal government not intervened last week en vigeur, we would need finally to rename the Great Depression as the Lesser Depression.

No one is pulling their money out of banks and putting it under mattresses. But the market has not really crashed to date. If it does, you can be sure that ordinary people will look at the name of the commercial bank in the website of their brokerage and will make their own decisions, rightly or (probably) wrongly, regarding the safety of commercial banks as a cash repository. Countering the run-on-the-bank mentality would be that the majority of Americans today use some form of payroll direct deposit or electronic bill pay tied to their accounts.

Tommorrow, though, let's discuss the real danger for all of us in what has happened in the past week.