At Five O’clock Do You Know Where Your Banker Has Put Your Money?

Wall Street Bull

Banking is inarguably the most prominent component of a country’s economic construct. It defines a country’s political and financial power. A well regulated financial system helps to guard a nation’s solvency and acts as holder of its liquidity. It provides and nourishes the fundamental mechanism that insures a constant and steady flow of labor forces in the sciences, technologies, engineering and mathematics (or STEM workforces). A nation’s global success is determined by the constant creation of avenues for social and economic upward mobility. It is fundamental to a vibrant economy that there exists a competent and prosperous labor force. As keepers of wealth a deregulated banking system has both good and bad influences on a country. A banking system that lacks stop mechanisms that insure the financial health of an investor can cause economic instability. Conversely an over regulated system may stifle growth and the ability to create wealth.
In 1932 two southern Republican gentlemen Virginia’s U.S. Senator Carter Glass and Alabama’s 3rd congressional district Congressman Henry B. Steagall sponsored legislature commonly termed the “Glass-Steagall Act”. This document was originally meant to endow the Federal Reserve Banks with the tools to better regulate monetary policies. As a result in 1933 the FDIC was born and banking laws clearly defined what identified a bank and non-banking business. It was an ambitious effort to safeguard investor dollars, keeping them safely segregated from too aggressive and risky investment practices.
President Clinton Repeals the Glass-Steagall ActIn 1999 the Glass-Steagall Act was repealed. Known as the ultimate GLB Act, because of its history, the Financial Services Modernization Act of 1999 came into being. Republican of Texas Phil Gramm and Iowa Republican House Representative Jim Leach managed to get the bill passed along party lines. Democratic President William Jefferson Clinton signed this legislature into law. This allowed the membrane that separated investment from commercial banks and insurance companies to disappear. This deregulation, unnoticed by many, opened the flood gates to new and more creative financial instruments. With ever increasing investors’ funds flowing into investment firms, the need to find avenues to grow wealth found an outlet in Europe.
Corporation balance sheets with cash bulging in its bottom lines aggressively hunted for places calculated to yield high returns. The deregulation of the Glass-Steagall Act also removed any inhibitions of conflict of interest that an investment banker may have. When investment funds moved from Main Street onto Wall Street global economics was forever changed. Investment bankers became super wealth creators for one percent of the country.
The Organization for Economic Cooperation and Development released a study illustrating the widening gap between the poor and the wealthy. It tells a tale of how over the last two decades the chasm has widened between the wealthy and the poor. As revenue once generated by a steady flow of educated workforces began to diminish. Social programs have become overburdened. Some economists have placed the blame of the 2008 financial meltdown and the Euro land crises as a result in part of the deregulation of the Wall Street banking system.
The most surprising result of the study’s findings is that the countries experiencing the fastest widening gap between the percentages of wealth and poverty are among the developed nations. The countries at the top of the list are Sweden, Germany, Israel, Finland and New Zealand. The country with the fastest expanding gap of disparaging impoverishment is in the United States.
Banking regulatory policies that have supported extreme wealth have ignored the fundamentals that helped in the growth of post-World War II economies. Over leveraged economies are now facing de-leveraging and austerity that is being felt primarily among the poor and middle class. To understand what price is needed in attaining a stable economy and banking system one need only to look to Ireland. While its austerity measures have yielded some success toward a balanced economy, its populace has paid a heavy price.
Perhaps the biggest impact on our economy in 2012 will be the ongoing investments in the Eurozone. A study was completed earlier in 2011 by the ratings company Fitch on the ten largest prime money market funds. The analysis revealed that there is a total of $658 billion in assets as of July 31, 2011. A menacing $309 billion or 47% of total funds is represented in debt obligations issued by European banks. It can be expected that in the advent of a Greek default investor confidence will take a nose dive.
As of September 2011 United States money market funds have reduced their exposure to European banks by 14 percent, according to the Wall Street Journal. Yet still European bank holdings make up 37.7 percent of the largest United States prime money market funds.
EurozoneOn July 21, 2010 President Barrack Obama signed in to law a federal statue named the Dodd-Frank Wall Street Reform and Consumer Protection Act. This reform was the first of its kind since the depression. Many economists have reservations that this Act will not result in any significant changes to the way banking systems are doing business.
The largest global bond management firm has projected that austerity programs instituted among developed countries with or without sound balance sheets will slow the growth in global economies by 1.5 to 2 percent, caused by the drag in the Eurozone; over the next one to two years. Eurozone productivity output will shrink between one and two percent. A term repeated many times among policy makers seeking to remedy flailing global banking systems with an infusion of bailout funds is “moral hazard”. At five o’clock do you know where your banker has put your money?