A couple of bank closures this afternoon, details below. That makes 90 so far in 2011:
No. 89: Polk County Bank in Johnston, Iowa was shut down by government regulators, then taken over by Grinnell State Bank of Grinnell, Iowa. Estimated cost to the FDIC: $12 million.
No. 90: Central Progressive Bank of Lacombe, La. was shut down, then taken over by First NBC Bank of New Orleans. Estimated cost to the FDIC: $58.1 million.
I am a conservative who supported deregulation of the banking industry. Now I think deregulation was a huge mistake and the Glass-Steagall Act should be restored and hedge funds should be more regulated or even banned. Glass-Steagall prevented banks from owning securities firms and expanding to multiple states. While I once thought this law was anti-business and outdated, I now realize regulation is necessary to keep the banking industry safe by keeping banks from growing too big. Glass-Steagall is a proven law that protected the American financial industry well for 70 years and needs to be brought back immediately.
The financial crisis of 2008 and the current economic problems are partly due to the repeal of Glass-Steagall and the failure to regulate hedge funds. I am certain the world economy cannot risk another meltdown now. There is simply not enough money to bail out governments and banks of the world again.
The Dodd-Frank Act was enacted as replacement for Glass-Stegall, but I believe this new law is weak and doesn’t go far enough to prevent banks from owning investment companies, controlling banks from growing too big, and regulating derivatives enough. Bank of America, a bank, now owns Merrill Lynch, a brokerage firm, for example. Merrill Lynch recently moved $75 trillion of derivatives to the FDIC insured Bank of America side. If these derivatives
fail, Bank of America will be affected, and how will the US government bail them out? The
derivatives market is $600 trillion, but the economy of the ENTIRE world is only $74 trillion.
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
http://articles.boston.com/2010-03-12/business/29329389_1_derivatives-gary-gensler-regulator
https://www.cia.gov/library/publications/the-world-factbook/geos/countrytemplate_xx.html
Billionaire Warren Buffet called derivatives “weapons of mass destruction” and Newt Gingrich thinks repealing Glass-Steagall was a big mistake.
http://www.economist.com/node/12274112
http://news.yahoo.com/newts-15-seconds-sun-094500280.html
Normally I am an optimist who doesn’t go around saying the sky is falling like a paranoid Chicken Little, but from my reading from trusted mainstream sources I have become quite worried about the economy. If I understood the risks of derivatives and debt in 2007 and said something, no one would have believed me. Now I hope people will listen when experts say the government needs to better regulate the financial industry.
Businesses and banks may say that regulation slows the economy, but I think that if the Glass-Steagall Act is not restored and hedge funds are not more closely regulated, there will soon be no economy at all. While I realize restoring Glass-Steagall and regulating derivatives is complex and difficult, I believe making a law is easier than repealing one.
I suggest reading “The Big Short” by Michael Lewis for a readable introduction to the financial crisis and why the banking industry needs to be regulated.
Restoring Glass-Steagall and regulating derivatives is a urgent problem and is not a issue that can wait to be fixed. I cannot stress this enough. Write to your elected officials, talk with your friends, and contact the media urging the government to make Glass-Steagall a law again and ask legislators to better regulate hedge funds.
“Too big to fail” is simply too big.