The Rotting Corpse of King Croesus

Now that News Corp has all purchased the Wall Street Journal and late capitalism is experiencing yet another paroxysm—er, market correction—I think it behooves us all to consider the fate of the lowly Glass-Steagall Act of 1933.

You see, way back in the 1920’s the market was booming—everybody was getting rich speculating in the market or on real estate, it seemed. After a series of bombings, notably one on Wall Street, the government was doing some ‘awareness raising’ of the threat of a small group of radical foreign terrorists to destroy America, but then again, this was before television, so you may not have heard of it.

Everything was going smoothly until the middle of September ’29, when investors started to sell off some of those speculative gains. An alarmed array of prominent tycoons and corporations (some of the very same people who would later try to overthrow President Roosevelt and establish a Fascist dictatorship) tried to stop the hemorrhaging by making very public bids to buy blue chip stock at prices above market. This worked, for about two days, and then on the 29th there was a famous and precipitous crash.

Now, Glass-Steagall was one of the measures instituted to make sure this sort of nonsense didn’t happen again. In addition to establishing the FDIC, the Act separated commercial banks from investment banks and insurance firms, because, to quote PBS’ Frontline, the Act was

seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors.

The Glass-Steagall Act was repealed in 1999 by a Republican congress and that defender of the poor and downtrodden, Bill Clinton, after a massive grassroots movement whose spirit of civil disobedience echoed the civil rights movement of the 1960’s.

The only problem was that these were the world’s largest financial institutions who were breaking the law en masse, and they’d bought enough elected officials to get them to legalize a slew of illegal mergers after the fact. The Citibank-Travelers Group merger in 1997 will always be noted as “technically illegal,” which is kind of a tip of the hat to the army of corporate lawyers who decided to just be as brazen as possible about it and see what happened.

What happened was that every commercial bank bought an investment bank or vice versa, every single one of which embarked on a massive campaign to do exactly what the act was supposed to prevent, as described above, pumping up stocks in order to screw the small investor out of some dough.

Ultimately, we don’t know exactly how much of this overvaluation occurred, but we do know that the financial industry was doing well enough such that when New York’s attorney general (now Governor) Spitzer caught them, ten major banks decided it would be cheaper to settle the case with the government to the tune of $1.43 billion dollars. And as any businessperson will tell you, if the scheme ended up being profitable with the fine included, you pretty much have a fiduciary obligation to do it again. Which they did and continue to do.

As I’m sure you know, the concept of “conflict of interest” went out with the millennium. Now we have ‘synergy’ instead.

Fast forward to last week. A friend of mine had been recommending buying JPMorganChase (JPM) and Blackstone Group (BX) stock. I countered that the financials are all way overvalued, particularly JPM. We’ve all been seeing the ripple effects of the sub-prime mortgage crisis; layoffs in the lending industry, hedge funds bleeding cash, even bank runs—for nostalgia’s sake, I suppose.

I don’t own stock on principle, but I bet I’d make a fair analyst. The only caveat is that I have no talent for spotting good buys; I can only forsee impending disaster, because those are the signs few people want to find. This brings me, incidentally, back to the News Corp/Dow Jones buyout. As there’s no such thing as a conflict of interest anymore, there’s no longer a problem with the way market information has been commoditized and tailored toward the investor.

Watch any business channel for ten minutes and it’ll become clear that the “news” being presented works in much the same way MTV used to deal with music—continuous advertising for the product broken up by short sustained bursts of commercial interruptions. The anchors are always talking about your portfolio, how to help you—the investor—ford the dangerous currents ahead and so forth. This is not to say that business news doesn’t report bad news, even though they try not to call it that. There’s always an upside to every tragedy, some opportunity to capitalize on one tragedy or another—wars, epidemics, rising gas prices.

All you need to know about financial stocks, I told my friend the other day, is in a little chart you’ll never see on CNBC or the upcoming Fox Business Channel. Here’s Productivity vs. Real Wages for the past decade or so:

Notice how productivity, a measure of total economic output per worker, has become completely uncoupled from the actual value of workers’ take-home pay (adjusted for inflation). But consumer spending has generally followed the same curve as productivity, which begs the question: how are Americans spending more with less money?

The answer is that the average American family is in five digits’ worth of credit card debt, their home is worth less than it was at the top of the housing bubble, and if the family experiences job loss, a medical emergency or divorce, they’re likely headed for a new brand of bankruptcy (courtesy of Joe Biden) where the credit card companies can seize your assets even if you’re dead.

As the chart demonstrates, it’s not like people are ever going to make enough money to pay the balance of these bad loans off. So, investors, here’s a market tip: anyone who has exposure to the financial crisis happening to poor and middle-class people is screwed, including but not limited to people who are exposed to such exposure and so forth fdown the line). You’ll notice that ‘gadget’ stocks, like RIM (the makers of Blackberry PDAs) are doing great. They’re not tied to the people the financial industry has spent so much time and effort screwing over.

By the way, my friend Anya, who writes about debt, beat me to this by linking to a Harvard Magazine piece making similar points. She knows much more about this than I do. 


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