It might be good to take a look at how the financial sector in our Nation got into the largest economic mess in history. Congress passed a law known as the Glass-Steagall Act of 1933, which was a part of President Roosevelt’s New Deal initiatives, and a law badly needed at that time. The new law divided the banking industry into two separate groups: one being the investment banks that traded, that risked and borrowed against their own capital, speculated, and provided merger and acquisition as well as other services; and the other being the commercial banks which were supposed to be accepting deposits, providing secure savings accounts and making normal loans made by regular lenders.
To put it in terms that I can understand, the division was supposed to have the risky institutions in one group and the less risky institutions with government backing in the other group. As many of us know, the government – as a part of the New Deal – acting through the FDIC, provided insurance to make sure that the deposits in the commercial banks would be secure for the citizens who had them. As a result, the commercial banks operated with less risk and with a more transparent capital basis in their deposits.
As you may know the Act was repealed by Congress in 1999. As a result, the investment banks – the risky institutions in the financial arena – were then combined with the commercial banks that are backed by FDIC insurance and other protections. This has resulted in financial disaster for a tremendous number of American citizens. To make matters worse, insurance companies are now in the mix and are allowed to be merged with commercial banks. The lack of regulation and control by the federal government is a major factor in our economic meltdown in the U.S.
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