Deceptive & Dangerous Shadows

Article excerpt

As Federal Reserve Chairman Ben Bernanke prepares to announce the results of the government's stress tests on Monday, he must be regretting the banking shadows and shadow bankers which have stalked him since he took office in early 2007.

As Federal Reserve Chairman Ben Bernanke prepares to announce the results of the government's stress tests on Monday, he must be regretting the banking shadows and shadow bankers which have stalked him since he took office in early 2007.

The world economy is sinking toward depression with the prospect of a wave of bankruptcies and unemployment looming. That, in turn, threatens a rise in defaults, even of prime personal and commercial loans, credit cards and mortgages.

The banks face a touch-and-go situation, especially those seriously exposed to derivatives, particularly credit default swaps. The clock is ticking and pressure is mounting. The immediate economic future of the world is in the balance.

The question that increasingly haunts global government officials is how the painful lessons learned from the Great Crash and Depression of 1929-34 could have been forgotten by so many.

The easy answer is that a combination of greed, reckless gambling and deception by the financial community has brought the world's major economies to their knees. Less obvious is that this has all been made possible by a staggering generational arrogance on the part of politicians.

It was Congress that repealed the legislation intended to prevent the re-occurrence of a depression, increased banking leverage and persuaded those banks to offer mortgages to the less well off. Yet, it is the politicians who now point their fingers at financiers while not even a hint of blame.

In 1933, the Glass-Steagall Act was passed, preventing deposit- taking banks from lending money to the potential purchasers of the securities they had underwritten and were selling to the public.

"Sweep accounts," which combined deposits with securities on which margin debt could be raised, were banned.

Most importantly, single state banking rules were enforced. This prevented the major money center banks from spreading nationwide and becoming the behemoths that are now said to be "too big to fail" but that some believe are too big to survive.

Repeal of these major laws and regulations opened the floodgates for financiers to become gamblers.

In the 1970s, many investment banks incorporated. Previously, they were managed by prudent partners whose personal wealth was at risk. They were now to be run by aggressive managers who risked not just their own money but that of customers and shareholders and whose bonuses were geared to earnings performance.

In the early 1990s, various investment banks and other newly rich institutions, such as hedge funds, began to borrow and lend money, like banks. …