Alexander Hamilton is buried in Trinity Churchyard at Broadway and Wall Street, just a few steps away from the New York Stock Exchange. It is fitting that it is so close, for his spirit is still felt in our financial markets. Our very existence as a country owes much to his understanding of the central role that financial markets would play — first in our survival as the United States of America and then in our development and prosperity.
Hamilton was not simply a visionary. He understood the mechanics of financial institutions and markets as well as how the people within them were motivated.
More than anyone else of his time in America, he understood how the combined energy and greed of financial markets could be harnessed to deliver internal development and international respect for our young country.
He was a realist about banks and the people who ran them, though. He once wrote, “Every bank in America is an enormous tax upon the people for the profit of individuals,” and made repeated references to what he called “the aristocracy of bank paper.”
We are now engaged in obtaining a deeper understanding of the central role of financial markets in our economy and our well-being. In New York and around the world, asset values are vaporizing and central banks are struggling to restore order to markets and confidence to shaken investors.
We are rightfully consumed with containment at the moment, and our government is pondering a tax rebate to avoid further damage to the economy. At some point, though, we may examine the role that banks, and the Federal Reserve, played in creating this mess. That would be a good thing.
In the wake of the 1929 stock market crash and the subsequent global economic depression, Congress, among other actions, passed the Glass-Steagall Act which prohibited banks from engaging in securities underwriting. There was money to be made in securities, though, and after a suitable period of penance for their contributions to the crash and depression banks began to agitate for relief from this restrictive law.
The banking industry’s whining about Glass-Steagall eventually paid off. Banks had complained that it was mired in old-fashioned ideas and that its restrictions did not reflect the realities of modern financial markets. That argument and a 30-year lobbying effort in Congress eventually produced the Gramm-Leach-Bliley Act, which broke down the wall between securities underwriting and banking — just in time to enter the world of 21st-century finance.
Few people spoke out against the idea, which was endorsed by America’s top banking regulator, Federal Reserve Chairman Alan Greenspan. It is tempting to say that his enthusiasm for the idea, and Congress’ action, made sense at the time, but that was not so. In fact, it made no sense then, and makes none now.
Perhaps the subprime lending disaster and the housing bubble it worsened would have happened without the giddy participation of our nation’s banking system. As Randy Newman’s song, “It’s a Jungle Out There,” goes though, “but I don’t think so.”
Banks eagerly bought up low-quality mortgage loans, packaged them up and sold them as securities — all the while using “three-card Monte” accounting constructs to keep the transactions off their balance sheets. Does that sound like something likely to further the interests of our economy? If the Congress had known that banks were going to do that, would they have approved their getting into the securities business? I don’t think so.
The Federal Reserve, the president and Congress have their hands full at this time. Their first priority is damage control, and that is as it should be. Eventually, though, the economy will right itself, with or without Washington’s help, and the president, the Federal Reserve and Congress will have time to consider what got us into this fix in the first place.
If we had to pick a single event that set off this economic stink bomb, it would have to be Alan Greenspan’s decision to support the expansion of bank activities into securities underwriting. While the Congress has a mind of its own, it is extremely doubtful that they would have approved this expansion in the face of his objections. He was at the height of his powers then, and his support for the idea made it bullet-proof, politically.
As soon as possible, Congress should extend its damage control operations to put banking back on solid ground, and reconstruct the wall between banking and stock-market gaming. If they do that, maybe Trinity Church would allow the burial of just one small piece of the rubble of this totally unnecessary market disaster in its churchyard — somewhere near Alexander Hamilton’s monument. He would appreciate the irony, and the honor.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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