Banking Reform Is Needed To Limit Economic Bubbles
Some big banks that received huge federal government bailouts have been paying the money back, largely to escape the increased federal scrutiny of operations and restrictions on executive pay and bonuses that the government imposed. In December alone, Bank of America paid back $45 billion, CitiGroup agreed to repay $20 billion, and Wells Fargo Bank said it would redeem $25 billion of preferred stock issued to the U.S. Treasury to cover the bank’s “toxic” assets. So far, more than 50 of the 737 institutions that received funds have squared the books. Rather than signaling a turnaround of fortunes in the financial sector, the action seems to be setting the stage for pumping up yet another speculative bubble in the U.S. economy.
The root causes of the current recession are buried in the Financial Services Modernization Act of 1999, passed by Congress and signed into law in a Faustian deal between the Clinton administration and Republicans. It essentially guts the Glass-Seagall Act of 1933, which, in response to the Great Depression, prohibited the integration of banking, insurance and stock trading into a single organization and separated riskier investment banking from traditional lending. Those combinations led to many bank failures in the 1930s.