This quote from the economist Martin A. Armstrong deserves comment:
“The real crisis emerges when the scheme of Investment Banking and proprietary trading then moves into the Commercial Banking realm. Blending the proprietary trading and Investment Banking with Commercial Banking opens the door for catastrophic meltdowns because the Commercial Banking is the cornerstone of the economy providing loans to business and they facilitate the velocity of money. When proprietary trading is merged with Commercial Banking, then the entire system is placed at risk. This was the importance of Glass-Steagall wisely separating each aspect. We cannot allow the Investment Banking culture to dominate the Commercial Banking field. This MUST be severed or the next crisis will be twice as bad as the last one.”
I’d have to say I agree, that the decision to repeal Glass-Steagall was the seed that produced the inevitable harvest almost 30 years later.
Banks were supposed to have Chinese Walls, though perhaps the phrase should have been “Japanese walls” – i.e. Paper-thin, to keep the brokers activities from the market-makers activities. And as Armstrong points out, inevitably leads to information flowing across these barriers.
It also begs the question how these large Banks can seriously justify packaging up sub-prime MBS (Mortgage Backed Securities) and sell them on as Prime assets knowing that in a credit crunch such was likely to happen back in 2007, that these assets would be seriously marked down.
The deaths of Bear Sterns and Lehman were therefore baked in the cake.
For full piece scroll about 3/4 down…
Bob Beckman posited that this was inevitable back when I read his book in the 80’s – “The Downwave”. Though to be honest, the main thrust of his argument was the Kondratieff (Kondratiev) curve of circa 54 years – which also happens to be about 2 generations of 25-30 years depending on female fertility/birth-rates.
Of course the mere fact that women in western countries are leaving it later and later to have their first-born means these cycles will be spread out – but you only have to look at the number of baby-bumps around the west, and toddlers/babies/under fives, to realise that this will all play out again, perhaps not quite as severe, in 25-30 years time. (circa 2030)
- Swiss Move to End Bank Proprietary Trading (financialsurvivalnetwork.com)