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How the U.S. Government is Failing to Learn from the Great Depression

April 30th, 2010

How the U.S. Government is Failing to Learn from the Great Depression

original article written by Net Advisor

After the stock market Crash of 1929, it was determined that part of the crash was caused by banks were allowed to be in the business of underwriting securities (stocks, bonds, etc). Thus a bank could act as a bank and it could act as a broker. Post 1929 Crash, there were a record number of banks failures: 20% or one out of ever 5 banks in the USA went under. There was a 50% foreclosure rate in the United States during the Great Depression, according to David C. Wheelock of the Federal Reserve Bank of St. Louis (Source: Washington Post).

Congress at that time determined that banks and brokers should not be in the same business. Congress basically told the banks that you can either be a bank or a broker but not both. The Banking Act of 1933 was thus created for this purpose. It has been more widely known as the Glass–Steagall Act.

CitiGroup had led the lobbying efforts over 25 years to get Congress to slowly strip and amending the Glass-Steagall Act.

By 1999, and near the top of the .com market, Congress decided that the economy and markets were doing so well over the last 60 years that we needed to do away with those old Depression era relic banking laws and get with the modern world – or so they thought.

So a bi-partisan Congress (yes, that means BOTH Republicans and Democrats), signed under President William “Bill” Clinton (D), passed the Financial Services Modernization Act of 1999 also known as the Gramm-Leach-Bliley Act.

Now banks, insurance companies, and brokers could all be in each others business again, just like they were during before the Depression, and the 1929 Crash. It only took about 8 years to nearly repeat the exact same scenarios that occurred just before the Crash of 1929 and subsequent Great Depression.

We hear a lot almost every day it may seem sometime that President Obama blames the past 8 years, past digressions, pretty much blames the Bush Administration for everything. There are some valid challenges that the Bush Administration made mistakes. However one should be aware of that when laws are passed on economy the size of the Titanic (no pun intended) it can take years for the impact for those laws to be cycled through the econ0my. They are not passed one day and the effect is immediate.

The elimination of the Glass-Steagall Act was not the only event that contributed to the cause of the 2007-2009 market melt-down, but it is a material factor. Congress needs to examine this law again. Congress that helped create the legal environment for these events to occur.

Based on my own research (and I have a ton of more evidence to argue, but that’s another topic), but Goldman Sachs did not single handedly, nor did they act as a primary contributor to bring down the domestic and global banks, freeze global credit markets, force people to lose jobs, or make people sign mortgages that they could never repay. They may be a good business at making deals, they may be a big firm, and a profitable firm, but based on the data and numbers we are talking about, they just didn’t control that kind of money to impact markets like that.

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short link: http://www.netadvisor.org/?p=6065

Author Note: Please note I wrote this article late, so I have not fully proofed it, and it may be revised for clarity as time permits. Interested in proofing articles, becoming a part-time editor? Please contact us.

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