The Current Banking System

By Terri R. Linnell

This paper shows how the deregulation of the banks after years of lobbying with money by the banking industry, caused the second roaring 20's through risky behaviors. An audit of the fed bank is necessary in order to determine appropriate solutions to our banking system.

A good video, 45 min, on the History of Banks http://video.google.com/videoplay?docid=-2550156453790090544#

The Glass-Steagal Act of 1933 was enacted to protect the people's money in the banks and to provide oversight in the banking system. The banks left standing had testified in Congress to help develop the bill and they even said the banks caused the Great Depression due to risky lending practices.

The Federal Reserve Bank is a private bank which was given the authority in 1913 to oversee our banking system. It used to have periodic meetings in Congress where the Chairman gave Congress the hard numbers on the health of the economy. Over the last 20 or so years, the hard numbers have dropped away, and less and less info has been given out by the Fed Bank. An Audit the Fed bill sits in the House and the Senate, but because the Speakers have control over which bills get voted on when, it has been very difficult to get a vote on it.

Many have mentioned the CRA is at cause of the collapse we are in. The CRA was enacted because banks avoided certain areas due to the high risk of those areas. The areas were so well defined they said you could draw a red line around them. Hence the term redlining. Since those areas are comprised of mostly minorities, in the beginning of the collapse the media blamed them, but I completely reject it. Congress, in an attempt to help people get loans passed a bill to certify CRA banks that had a certain percentage of loans in the redlined districts. --But most of the banks didn't take the risks and the bill sat barely used.

In 1999, after the banking industry spent millions in lobbying money on our Congressmen over 20 years trying to get the Glass-Steagal Act repealed, our Congressmen finally deregulated the banks in the Gramm-Leach-Bliley Act. It was a Republican Congress in a bi-partisan move. Democrats like Kennedy, Feinstein and Biden even helped to pass it. Greenspan, the Federal Chairman at the time said to the effect 'I doubt the banks would do those risky investments again, I feel they have learned their lesson.' Although it passed with high support and was 'veto-proof', President Clinton could have vetoed it to ask for a re-vote, but he didn't. It was signed into law. I would like to see an immediate repeal vote on this act to provide stability in our banks. The banking lobbyists spent millions to now have us trillions in debt bailing the industries involved out.

So what effect did it have? It said if you were a CRA certified bank, if you showed you were willing to take risks, you could become deregulated. That was a huge poisoned carrot to dangle in front of the banks! The banks desperately wanted to be deregulated and willingly became CRA certified by creating risky loans so they could obtain the percentage they needed. In this exercise, they found also prices rose in those redlined districts because of the loose criteria on the loans. Wow, if they did these loans everywhere, look at the money that could be made! Uh Oh!

Please note: The looser the credit, the higher the prices. This we have seen across the board with our farm equipment, cars, etc. over the years. Now that we have long term loans, prices rose. Instead of 3 months to buy a car cash, our cars are a lot more now. We have also seen this in our grocery stores, hardware stores, etc., now that credit is used more and more.

What other effects did it have? Before our banks were not allowed to own or be owned by other companies. Remember the debit only card? Now we saw the birth of the debit/credit card, because the risky unsecured debt companies of credit cards could now be bought by or owned by banks. The insurance industry also delved into the banks.

Another note: I have noticed there are two common words which imply safety, yet are actually risks. Investment and insurance. Both have risks, we just have gone though about 60 years without a normal deflation period, so we, as a people, now associate it as 'no risk', but it does have some. It is due to the belief it is 'no risk' that expectations have formed to use it to provide safety.

A note of a note: Many have asked how insurance is a risk? Insurance doesn't save money. It bets you will pay more into it than you take out, and it is a spend-as-you-go system. Since it spent as it went, it was completely unprepared for the housing collapse it insured. It is also hurt by unemployment, because many healthy families have opted out of cobra due to the cost, so too many who still have it actually make a profit and use more than they pay. This has forced and will force price increases on many other types of insurance.

We have just experienced a second roaring 20's and are dealing with the 'hangover' effects. We even have more on the horizon coming as seen in my other notes.

Final Note: Our states issue bonds to balance the budget. They are just a piece of paper with a promise to pay. Bonds are loans liable by taxpayers. If the bond goes to default and you are the last taxpayer in the state, you are 100% responsible. Vote wisely.

Again, if you boil it down to the root cause, it was the lobbyist's money that did it. That is why I'm firmly against lobbying with money. It's bribery made legal by Congress. I'm also firmly against earmarks. Earmarks are used by our Congressmen to return the favors. We have federal committees, along with state and local governments who are responsible for those items, no one Congressmen should have the power to do it by themselves. If they were Kings they could, but we do not have Kings here, nor do we want them. The lobbying/earmark cycle is definitely the root cause in my opinion.

It will not be difficult to fix the economy once the lobbying/earmark purse-strings are cut. Then we can roll up our sleeves in Congress and get the job done correctly. This doesn't mean I'm for regulating or deregulating the banks. The decisions must be made after the audit of the fed.