Comments on: The Glass-Steagall Act Kept Banks in Order Until 1990

By: Kaboom

Kaboom — Sat, 27 Sep 2008 21:52:53 +0000

I actually thought that the Banking Act of 1933 (No.2) was repealed on 12th November, 1999, after bipartisan passage of the Gramm-Leach-Bailey Act of 1999, and signed into law by Clinton without power of veto.

Silly me.

By: L Urban Kohler

L Urban Kohler — Fri, 26 Sep 2008 22:08:31 +0000

So, John, debt only creates inflation if loans are not secured by tangible assets or future cash flows? Isn't what is happening right now and recently, a lot of debt being secured NOMINALLY by "future tax flows" --that would be the debt incurred by the American government, but since they lower the taxes and raise the ceiling of the national debt, isn't this false security? If it's never to be repaid, how is that "secured?" The same is true for the Enron -type corporate debt. They cook the books to raise the expectations of future cash flows and create a bunch of new money (as debt) that will never be repaid, so what does it do, it goes into the economy in vast amounts and, more currency chasing the same goods, causes inflation! No? With a different system of finance, --one that does not reward bad loans equally as "good" loans --in other words with accountability built in, we would not be having this crisis.

By: Stuart Davies

Stuart Davies — Fri, 26 Sep 2008 15:39:53 +0000

You are missing the point here John. Do you understand where money comes from in our current system? It comes into existence through the creation of new debt. since that "loan" only creates the principle, but not the compound interest required to repay it, the only mechanism to supply the means to repay THAT interest is the further expansion of the money supply through the issuance of yet more debt. In other words, both the money supply and the debt load are locked in an ever expanding feedback loop, the epitome of a vicious circle. Because the interest on debt is compounded, the rate of expansion of the money supply, and hence the issuance of NEW debt, MUST BE EXPONENTIAL.
The end result is not just an oversupply of money, but an unbearable burden of debt. On the one hand, it is accurate to say that an excess of money leads to an excess of credit/debt, which is the point of view that you and many others fix upon. However, my point is that in a fiat currency system like ours, money is created by debt in the first place, the two are essentially different aspects of the same thing. What I'm getting at that the oversupply of money is not an independent causal factor which leads to an excess of credit/debt, but that an excess of BOTH is the inevitable end stage result of a debt based monetary system. The money supply MUST expand or the system fails. The credit/debt load MUST expand in order to create more money.... ad infinitum, until it implodes. Get it?

By: John

John — Thu, 25 Sep 2008 18:09:49 +0000

Stuart, I mostly agree with you accept one point.

Debt itself does not create inflation. In a world without excess money supply, growth of debt is restricted because debt tends to be secured by tangible assets or future cash flows. You actually have to have real economic growth to support the money being borrowed. Now, if you introduce excess money supply into the system, you throw that restriction out the window because the money supply is growing faster than the economy, providing excess credit and resultantly excess debt.

By: Stuart Davies

Stuart Davies — Thu, 25 Sep 2008 17:09:00 +0000

..."the present credit crisis is the natural consequence of high leverage, the repeal of the Glass-Steagall Act and the creation of excessive and complex derivatives." On one level, this is certainly correct - these are proximate causal events in a long chain of cause and effect, but is this the true root of the problem?
In fact, this state of "high leverage", known as astronomical, mind-boggling debt to the layperson, is an inevitable outcome of a debt based monetary system. In certain circles, including those who write for and read the Daily Reckoning, it is taken as a self evident truth that any currency which is not backed by a finite, tangible asset such as gold.... will, given human nature, have a powerful tendency towards monetary inflation, an excess of supply which will eventually cause the currency to fail.
This observation gets us even closer to the root of the problem, but even so we aren't quite there yet. We don't need to try to wrap our brains around the mind numbing complexities of derivatives, we need only ask WHY do fiat currencies have this tendency towards excessive supply? The answer is pretty simple: BECAUSE THIS MONEY IS ACTUALLY CREATED BY DEBT... and because there is never enough money in existence at any given point to repay the aggregate of the principal and interest that is owed on the debt that exists at that time, due to the nature of compound interest. THIS MEANS THAT THE MONEY SUPPLY MUST CONTINUALLY EXPAND AT AN EXPONENTIAL RATE IN ORDER TO REPAY THE DEBT THAT IS ITSELF EXPANDING AT AN EXPONENTIAL RATE! Can anyone dream up a better definition of mass insanity?
The cycle of an ever expanding monetary supply, inextricably linked to an ever expanding debt load, is the essential structural flaw that is part and parcel of the central banker's long running scam, the debt based monetary system. The crisis we are faced with now is the implosion that has been inevitable all along.