Back in the early 70’s a proposal was made to repeal the securities regulation that required that short sales on stock (selling a stock now, but delivering it a later date, in the hope that the price has gone down by the time you have to deliver) only be done on an up-tick in price of the stock.
Leave aside the merit of that regulation for the time being, it came into existence as part of the New Deal, after the Great Crash.
In the 70’s a proposal to repeal it got nowhere. There was a huge public outcry, and it was shelved.
In June of this year, the up-tick rule was ended by the SEC.
No one outside the securities industry cared and it barely made the news.
Welsh goes on the highlight the biggest deregulatory blunder of the Republican-held years, the 1999 repeal of Glass-Steagall, that was designed to prevent the consolidation of financial institutions and the conflicts of interest that accompany such amalgamation. The rest of the article is an interesting comparison between the economic/financial/governmental atmosphere of 1920's America and our present age, with Welsh highlighting the fact that, along with the disappearance of the regulatory safety net, the biggest economic threat is debt. Not just consumer debt, which is unsecured, but the debt financial institutions incur as a result of all that unsecured debt. Banks use all that credit card debt as collateral for loans. Some of them go to homeowners in the form of mortgages. Some goes to small business owners. Huge chunks of it, however, go to investments overseas, particularly in China. This is where the risk is greatest; as there is no legal structure to force foreign businesses to pay back loans, should the Chinese decide to write off these debts, or should they renege in some other form, there is nothing substantive holding the house of cards together.
Already, we are seeing signs that unsecured bank debt is leading to serious problems. The collapse of the so-called "subprime lending market" (really predatory lending practices on those only marginally qualified for a mortgage) is leading to serious consequences. Of course, the worst part about this is that is was telegraphed well in advance. A year before the housing bubble actually burst there was almost constant buzz about when it would burst and what the fallout would be. Were financial institutions truly rational, they would have cut back on such loans, restructured or refinanced others, and generally eased the fall. Instead, they all sought to get as much short term gain as they could; the result were hundred and thousands more marginal loans than should have been made. When the bubble did burst, these last to get on board the train were the first to be booted off. The problem, of course, is the train didn't stop. It wrecked, and foreclosures are way up. Thanks to another wonderful act of corporate charity on the part of the Republican Congress, it is much more difficult to file for bankruptcy, so there are fewer ways to escape the debts incurred partly as a result of bankers greed.
While all this is a tragedy for homeowners, there are banks teetering on the edge. All those marginal mortgages which are now worthless, and most likely never to be repaid, were used as collateral for other loans. Such leveraged loans, and the intricate web of paper that underlies them, are the keystone to a major economic landslide that is already shaking and quaking. Since so much of our financial system is internationalized (without any legal framework for managing it) this is not just bad news for the US, but for all of us. It was the collapse of international banking, due in part to economic retraction in the early-1930's, that led to the general collapse of world-wide capitalism we call the Great Depression. The market collapse in 1929 was bad and led to horrid consequences, but it took a while for the real and final blow to fall.
We are setting ourselves up for the same kind of thing now. Of course, none of this is discussed, not because we Americans are stupid or ignorant, but because editors and journalists at our major news organs don't understand this kind of thing, so they think we don't, either. When the collapse does come (and it will; the question is only what the magnitude might be) we may ask ourselves why we didn't see it coming. Thankfully, some did. If only their voices were heeded.
