Sunday, May 13, 2012

A Brief History of the Death of Glass-Steagall

LAW - Glass-Steagall Act prohibits banks from underwriting stocks and bonds.
LAW - Banks may underwrite 5% of gross revenues
FED - Greenspan becomes Fed chair
LAW - Banks may underwrite 10% of gross revenues
LAW - Banks may underwrite 25% of gross revenues
LAW - Glass-Steagall repealed
FED - "Risk of underwriting had proven to be manageable.  Banks now have the right to acquire securities firms outright."
BANKS - Quantitative Analysts conclude reliable US housing market pricing uptrend
BANKS - Mortgage underwriting standards loosened, demand increases, mortgages securitized, sliced up and sold worldwide, with AAA ratings from ratings agencies paid by security issuers.
ECONOMY - Dot com bubble bursts.  Speculative investors out of stock market.  Recession.  Speculative investors into housing market.
FED - Bernanke becomes Fed chair
ECONOMY  - Housing bubble bursts.
ECONOMY - Most serious recession since Great Depression
FED - Ex-Chairman Greenspan concedes that it was a "mistake believing banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions."
FED - Short term rates set at zero to stimulate growth.
FED - Quantitative Easing ("QE") I & II, during which the Fed bought mortgage backed securities then short term Treasuries to lower rates and stimulate economy.
FED - Short term interest rate policy set for a minimum of two years.
FED - Operation Twist, where Fed exchanged short term Treasuries for long term Treasuries to lower long term rates and stimulate housing.

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