Investors love risk, but they hate uncertainty.
What’s the difference? Risk is whether the stock you bought will go up or down in value. Uncertainty is whether the stock you bought is an actual stock or the financial equivalent of a fish head wrapped in newspaper.
By now we are all familiar with the so-called credit default swaps that let a staggering amount of uncertainty into global markets. That hidden uncertainty got passed around all over the world, including into all kinds of institutions looking for low-risk investments — everything from Norwegian Villages to your mom’s 401K.
“That oughta be illegal!” you say? Well, once upon a time, it was!
The writing for the current financial crisis was on the wall 10 years ago when Glass-Steagall Act (passed in 1933) was repealed.
(Side note to the blame-Clinton crowd: the bill was passed with a veto-proof majority, so he may as well have signed it as he did. Still, I wish he would have opposed it anyway instead of cheerleading it.)
Who was behind the repealing of Glass-Steagall? Sen. Phill Gramm of Texas.
”The world changes, and we have to change with it,” said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ”We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.”
The freedom that Gramm is talking about is the freedom to sell steaming piles of nothing, cleverly disguised as AAA rated securities, to the tune of many times our own GDP, more than the GDP of the entire world.
Opposing Gramm-Leach-Bliley were one Republican Senator (Richard C. Shelby of Alabama) and seven Democrats (Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Byron L. Dorgan of North Dakota, and the late, greate Paul Wellstone of Minnesota).
In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it (15 members did not vote).
Senators Dorgan and Wellstone were eerily, accurately prescient at the time:
”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ‘’seemed determined to unlearn the lessons from our past mistakes.”
”Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,” Mr. Wellstone said. ”Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.”
It sounds counter-intuitive, but risk and stability (the embodiment of certainty) go hand in hand. Without stability, people cannot take risks — they are simply fighting to survive in a world of chaos.
I hope the current financial crisis at least results in a return to sane laws in the style of Glass-Steagall. And maybe, just maybe, we’ll learn our lesson from history this time.