Monday, November 3, 2008

Jekyll and Hyde

After tomorrow, the howling from Washington should get louder. Frustrated congressmen, told by policymakers they trusted, that Wall Street needed a bailout to keep lending and keep the economy out of the ditch are now finding that the banks have taken the money, and, well, that's about it. They've taken the money.

And they haven't resumed lending, and the economy still appears to be headed for the ditch. Worst auto sales since 1945, according to General Motors. So Barney Frank plans hearings.

In a nutshell, the problem with the banking system is that it has two sides. One is the predatory trading culture of the proprietary desk, the hedge funds, the sharks and their lumbering prey--family offices skinned through fund of fund managers, yield chasing brain dormant European institutions whose managers' knowledge of English didn't make it past the letter A, repeated three times, and such. That world is blowing up. But it's social utility, even in good times, is obscure.

The other side of the banking system is the prosaic, utility like servicing of the needs of individuals, consumers and savers, or businesses, whether large or small. That's the side that we need. For individuals, it's providing car loans to school teachers, insurance policies to young families, and the like. For companies large and small, it's providing cash management services, export/import letters of credit, working capital lines and such.

Imperfectly, the Glass Steagall Act segregated the two activities. Glass Steagall was out of date. There was inevitably a certain amount of mixing things up. But since regulation really took hold in what the convicted felon Conrad Black used to describe to Bush 43 as the 'Anglosphere', those activities have become hopelessly intertwined. The very idea of an 'originate to distribute' business model blended the two. Haven't heard much about originate to distribute since the distribution end of things got all gummed up and the originators turned out not to have the, er, capital, to hold what they had in the pipeline.

Haven't heard much from Lord Black since his conviction, either. I wonder where in the Anglosphere he'll serve his sentence. A Canadian national, who surrendered that citizenship for British peerage, convicted in a United States court. Perhaps Gitmo?

In any event, for his howling hearings, Congressman Frank's first witness should be Phil Gramm.

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