In a rather interesting article Thursday morning Mish attempted to argue that reinstating Glass-Steagall "wouldn't have solved anything."
The idea that Glass-Steagall would have done much, if anything to prevent this crisis is potty. Goldman Sachs (GS), Bear Stearns, and Lehman would all have done what they did. Wells Fargo (WFC) would have kept its pool of option arms, and the rest of the banks would have followed their lend to securitize model and the regional banks would still be losing their asses on silly commercial real estate deals.
Mish misses the point of Glass-Steagall.
It is not that Glass-Steagall would prevent people from acting fraudulently. It would not have done so.
Indeed, without prosecution of wrong-doing and strong anti-fraud statutes that are not only on the books but are actively enforced against everyone, including the "big society and political class", there is no business structure that prevents the sort of BS games we saw during the housing bubble.
However, Glass-Steagall's point is not to prevent fraud.
It is to prevent fraud, when and if it occurs, from bringing down the entire banking system and therefore removing the "you can't allow us to pay for our crimes in the free market or the world will end" argument from the banksters' arsenal of arguments.
I believe it is unethical if not outright fraudulent to front run trades or to trade against advice given to clients. Units that offer advice must be physically separated, not logically separated from units that trade their own accounts. The only sure-fire way to make that happen is to physically breakup the companies.
All of this dark-pool stuff of sniffing out orders and front-running trades has to go as well.
Yep. I agree entirely.
But then Mish makes the "be careful what you wish for" argument:
Everyone wants more small business lending and less risk. Sorry folks, that is physically and logically impossible. Reducing reckless risk, especially risk born by others (taxpayers) is a good idea, but it's important to understand exactly what that will mean to earnings going forward.
Think of the affect lower share prices and reduced risk taking will have on pension plans and 401Ks. In the long run, less risk is a good thing, and I am in favor of it. I just doubt people are prepared for what it means.
This is a logically false argument.
We have two options:
- We can take our medicine. This means splitting up the commercial banking and investment functions into physically and legally separate firms so that never again will the investment activities of a firm be able to trash the depository function and thus expose the taxpayer to systemic collapse. We can prosecute prior fraud and make clear that any future fraud will also draw an immediate and vigorous criminal and civil fraud statute response. Yes, this will mean the equity market will adjust to actual, not falsely-inflated value on a forward basis and yes, this means we will trade lower - perhaps a lot lower. But it also means the market will be stable with prices based on actual earnings and profits, not fraudulent ponzi-style games.
- We can continue to pretend that market prices don't matter, that you can securitize debt and yet end up with more yield in the product securities than existed in the original lending transactions (that is, that people not only work for free but work for a negative amount of money!) and that there will always be a greater sucker upon which to offload whatever we buy. In other words we can continue to do what we've done up until now - base our entire capital market structure on an ever-expanding pyramid of fraud and lies. We've done this twice in the last ten years and the consequences were two horrific market crashes in a decade's time, employment capacity utilization back to 1980s levels, a $1.6 trillion deficit as far as the eye can see and a market that has lost half or more of its value - on balance and with account for inflation - over that decade's time.
If we continue to choose path #2 there is a very real risk that the next crash will be too large for the government to be able to rescue or that the public will not permit another rescue irrespective of the government's desire to do so. That is, either the buyers of our debt may say "no mas!" or the people may say "screw you!" Indeed it should be assumed at this point that another bailout at any time in the next decade or more will be unable to be mounted, either due to public outrage, creditor revolt or both.
As such, choice #2 is literally gambling with the future of the nation - and that, my friends, is a gamble we must not take.
Whether Goldman likes it or not.