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View Full Version : Economics The Repeal of Glass-Steagall and the Uptick Rule


Mr. Kotter
12-08-2009, 05:42 PM
How much did repeal of the Glass-Steagall and the "uptick rule" have to do with the bail-outs, and the current economic difficulties? Anyone have any thoughts?

I'm interested in the opinion of others, because until recently much of the blame for our current economic crisis had been cast on the volatility of the real estate market and derivatives--which certainly contributed in a big way.

However, the more I've read lately, it seems to me that the repeal of Glass-Steagall and the uptick rule....had just as much, if not more, to do with it than many people seem willing to concede.

I'm no huge fan of government regulation. However, too often when the private sector is allowed to succomb to the temptations of greed, they do. Some government regulations have proven not only wise, but necessary.

It seems to me, Glass-Steagall and the uptick rule, along with regulation of derivatives....would have gone a long way toward preventing this current financial crisis. I'm still trying to digest the variety of opinion and writing that's available on the subject. I don't think it's too early to say that the government screwed the pooch on this one.

And, not in the way libertarian ideologues or fans of trickle-down theory would say--in fact, it's quite the opposite. It would seem to me that lack of government regulation and over-sight in these cases have, in large part, put us in our present predicament.

So much for "too much government regulation".... :shake:

BucEyedPea
12-08-2009, 06:14 PM
This was dicussed at length when you weren't around with some terrific contributions.

In the system we have GS makes sense. In a different system it wouldn't.( the kind I'd like)
Don't forget GS was replaced with new and untried regulations.

The up-tick rule is rational imo.

But when I hear talk of eliminating short sales....NO!

KC native
12-08-2009, 06:26 PM
The uptick rule didn't really have crap to do with all of this and reinstating it would be meaningless as any adept trader can easily make an uptick to get his short sale to go off.

Now, the repeal of Glass Steagall is another matter all together. Glass Steagall kept banks and investment banks separate. It basically said a bank is a bank (which used to be a fairly boring business) and an investment bank is an investment bank. When this law was in place the banks were more concerned with the credit quality of the loans they made because there was a greater likelihood that they would carry them to maturity. Once, banks could securitize their loans at will is when you really start to see one element of the beginnings of this crisis. Well, this securitization went into hyperdrive due to low rates and the deregulation of the financial sector made this even worse as these entities got bigger and bigger and were fueled by cheap money (low interest rates).

This of course all played into derivatives. Now, let's not lump all derivatives into the same basket (Stewie). The particular ones that played a big part in this were the Credit Default Swaps. Initially these were contracts betting that a certain debt instrument would/would not default or lose it's rating. Typically they were bought by institutional investors wishing to hedge their fixed income positions. Well, since there wasn't any regulation of these companies, such as AIG, wrote a ton of these based upon faulty probabilities and didn't receive enough premium to cover the losses associated with the CDS positions as the debt or companies began to default or be downgraded. Well, since securitization was in hyperdrive the geniuses on Wall Street came up with the idea to start doing CDS's on the myriad of sliced and diced loan pools so they could bring in even more money (they also started doing them on individual companies). Well, we all see how that ended (and for the slow like disHonest, taxpayer intervention).

So, IMO, Glass Steagall should be immediately reinstated. Credit Default Swaps should be tightly regulated, be traded on an exchange (so there is a clearing house and collateral requirements), and should be limited to those with actual positions or exposures to hedge.

KC Dan
12-08-2009, 06:33 PM
So, IMO, Glass Steagall should be immediately reinstated. Credit Default Swaps should be tightly regulated, be traded on an exchange (so there is a clearing house and collateral requirements), and should be limited to those with actual positions or exposures to hedge.
I knew if I waited long enough that you would eventually post something that I would 100% agree with profoundly! :toast:

KC native
12-08-2009, 06:36 PM
I've actually been reading a great book. Bailout Nation by Barry Ritholz and it's terrific. I haven't got too far into (about 35%) but I just read a great chapter in it and it takes how about how radically Alan Greenspan changed the Fed.

He talks of how, under Greenspan, the Fed changed from it's traditional role of full employment and keeping inflation in check to one of targeting asset prices. He covers Greenspan's reactions to certain events and highlights how Greenspan lowered rates because certain asset prices were depressed or had recently crashed eg his lowering rates after the tech bubble imploded or when LTCM blew up.

It was only a chapter but it was enlightening and written very well. I highly encourage everyone to check out his book as he doesn't have a political axe to grind unlike some economic writers.

Anyways, here is the amazon link for it.

http://www.amazon.com/Bailout-Nation-Corrupted-Street-Economy/dp/0470520388/ref=sr_1_1?ie=UTF8&s=books&qid=1260318897&sr=8-1

Calcountry
12-08-2009, 06:55 PM
The uptick rule didn't really have crap to do with all of this and reinstating it would be meaningless as any adept trader can easily make an uptick to get his short sale to go off.

Now, the repeal of Glass Steagall is another matter all together. Glass Steagall kept banks and investment banks separate. It basically said a bank is a bank (which used to be a fairly boring business) and an investment bank is an investment bank. When this law was in place the banks were more concerned with the credit quality of the loans they made because there was a greater likelihood that they would carry them to maturity. Once, banks could securitize their loans at will is when you really start to see one element of the beginnings of this crisis. Well, this securitization went into hyperdrive due to low rates and the deregulation of the financial sector made this even worse as these entities got bigger and bigger and were fueled by cheap money (low interest rates).

This of course all played into derivatives. Now, let's not lump all derivatives into the same basket (Stewie). The particular ones that played a big part in this were the Credit Default Swaps. Initially these were contracts betting that a certain debt instrument would/would not default or lose it's rating. Typically they were bought by institutional investors wishing to hedge their fixed income positions. Well, since there wasn't any regulation of these companies, such as AIG, wrote a ton of these based upon faulty probabilities and didn't receive enough premium to cover the losses associated with the CDS positions as the debt or companies began to default or be downgraded. Well, since securitization was in hyperdrive the geniuses on Wall Street came up with the idea to start doing CDS's on the myriad of sliced and diced loan pools so they could bring in even more money (they also started doing them on individual companies). Well, we all see how that ended (and for the slow like disHonest, taxpayer intervention).

So, IMO, Glass Steagall should be immediately reinstated. Credit Default Swaps should be tightly regulated, be traded on an exchange (so there is a clearing house and collateral requirements), and should be limited to those with actual positions or exposures to hedge.More important than all this, is that we get health care passed by Christmas, so we can start paying for it immediately, then get the benefits after BO gets re elected in 2012

Garcia Bronco
12-08-2009, 07:49 PM
Well because of the GLB...banks were able to own investment houses AND insurance companies...and that led to the banks cooking the books on mortgage securities, and getting excellent ratings. It plays a huge roll in the housing collapse from a securites perspective. Bill Clinton signed it into law and it voted on by both Democrats and Republicans

http://upload.wikimedia.org/wikipedia/commons/thumb/2/25/Gramm-Leach-Bliley_Vote_1999.png/800px-Gramm-Leach-Bliley_Vote_1999.png (http://upload.wikimedia.org/wikipedia/commons/2/25/Gramm-Leach-Bliley_Vote_1999.png)

The republicans didn't have a strong majority...certainly not enough to defeat a filibuster.

DEMOCRATS AND REPUBLICANS TANKED OUR ECONOMY AND DON'T LET THEM TELL YOU DIFFERENT.

KC Dan
12-08-2009, 08:12 PM
The republicans didn't have a strong majority...certainly not enough to defeat a filibuster.

DEMOCRATS AND REPUBLICANS TANKED OUR ECONOMY AND DON'T LET THEM TELL YOU DIFFERENT.
THIS x Eleventy Billion

Mr. Kotter
12-08-2009, 08:16 PM
Well because of the GLB...banks were able to own investment houses AND insurance companies...and that led to the banks cooking the books on mortgage securities, and getting excellent ratings. It plays a huge roll in the housing collapse from a securites perspective. Bill Clinton signed it into law and it voted on by both Democrats and Republicans

The republicans didn't have a strong majority...certainly not enough to defeat a filibuster.

DEMOCRATS AND REPUBLICANS TANKED OUR ECONOMY AND DON'T LET THEM TELL YOU DIFFERENT.

That's the thing; Dems blame Reps, and Reps blame Dems....when both had plenty to do with this entire debacle. Neither side is willing to look into the mirror and accept blame, and then procede to fix what they broke. No sense of responsibility by either party, so they just keep pointing fingers and covering the asses of their rich friends who got richer because they got punked by those same rich friends. What a joke.

:shake:

KC native
12-08-2009, 08:52 PM
The republicans didn't have a strong majority...certainly not enough to defeat a filibuster.

DEMOCRATS AND REPUBLICANS TANKED OUR ECONOMY AND DON'T LET THEM TELL YOU DIFFERENT.

Which is exactly why I have a huge disdain for politicians that talk about economics. Both sides have their hands dirty in this and the deal with GLB was that they didn't really understand it and IIRC it was passed as part of a huge spending bill.

Amnorix
12-09-2009, 07:18 AM
They were both contributing factors, along with many others.

Mr. Kotter
12-09-2009, 10:36 AM
They were both contributing factors, along with many others.

Yup, that's what I've discovered. The thing that really bothers me about this though....along with the lack of regulation of derivatives, is that the result was entirely predictable and PREVENTABLE....had people in politics and the industry merely exercised reasonable judgement and their moral duty.

It think it's becoming more and more clear, that there was a willing suspension of good judgement justified by nothing more than sheer arrogance and greed triumphing over the public good and general welfare.

It's an instance when the calls for less regulation, and less government "interference" should have been not only ignored---but exposed by people who know better, and as the money-grab that it was. Except that I suspect a whole of lot of the folks who were in a position to warn us....instead exploited the cash cow presented to them, and have instead benefited from the very policies that they should have been fighting and better educating the public about possible consequences.

Mr. Kotter
12-09-2009, 10:44 AM
I've actually been reading a great book. Bailout Nation by Barry Ritholz and it's terrific.




I'll have to add it to my "list"....

banyon
12-09-2009, 10:47 AM
Yup, that's what I've discovered. The thing that really bothers me about this though....along with the lack of regulation of derivatives, is that the result was entirely predictable and PREVENTABLE....had people in politics and the industry merely exercised reasonable judgement and their moral duty.

It think it's becoming more and more clear, that there was a willing suspension of good judgement justified by nothing more than sheer arrogance and greed triumphing over the public good and general welfare.

It's an instance when the calls for less regulation, and less government "interference" should have been not only ignored---but exposed by people who know better, and as the money-grab that it was. Except that I suspect a whole of lot of the folks who were in a position to warn us....instead exploited the cash cow presented to them, and have instead benefited from the very policies that they should have been fighting and better educating the public about possible consequences.

Check out Byron Dorgan predicting this as the legislation was being passed:

http://chiefsplanet.com/BB/showpost.php?p=5515194&postcount=4

Mr. Kotter
12-09-2009, 10:54 AM
Check out Byron Dorgan predicting this as the legislation was being passed:

http://chiefsplanet.com/BB/showpost.php?p=5515194&postcount=4

Doesn't surprise me; he's, generally, a pretty good guy.

Too bad so many others chose to play dumb about it. :shake: