Similar to the Great Depression, this current financial crisis was caused by excessive risk taking by banks. Only this time, instead of a run on banks, millions of homeowners are walking away from their homes. Can Obama’s new plan for financial reform improve the financial system and help the US emerge from recession like Roosevelt did in the 1930’s? See the following article from Housing Predictor for more on this.
Step into the library of President Franklin Delano Roosevelt’s after paying the admission and the first thing you see is a corner dedicated to the Great Depression, America’s last big battle with the U.S. economy. For any mortal in touch with reality these days a cold chill reverberates down your spine.
The nation was in chaos when Roosevelt was first inaugurated on March 4, 1933. Paralyzed by fear and banking failures, the economic system was faltering. Swift social and economic change was the calling card of the generation as Roosevelt gained a reputation as one of the most controversial president’s in U.S. history.
Millions of people visit the library each year built on 16-acres in the picturesque Hudson Valley as the first presidential library in the United States in 1939. The facility was constructed on land donated by the late president to house the massive quantity of historical papers, books and memorabilia accumulated during Roosevelt’s lifetime of public service.
In a corner of the building a special area is devoted to the Great Depression, highlighting the Glass-Steagall Act, also known as the Banking Act of 1933. The law prohibited commercial banks from engaging in the investment business, and was eliminated by President Bill Clinton towards the end of his administration. The move is the single largest act to trigger the nation’s financial crisis.
Banking lobbyists pushed for its demise for more than two decades, giving Wall Street traders the right to sell derivatives and securities without regulatory controls. The action proved to be a major mistake.
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The series of events that followed set the stage for the foreclosure epidemic, which Housing Predictor forecasts will cost 17-million homeowners their homes before it’s complete. An estimated 5- million have already been foreclosed. Glass-Steagall was originally part of Roosevelt’s New Deal program, becoming permanent until Clinton abolished the act.
Enacted as an emergency response to the failure of almost 5,000 banks during the Great Depression as customers ran on banks withdrawing their deposits, the act provided tighter regulation of big national banks through the Federal Reserve System, halted bank sales of securities and created the Federal Deposit Insurance Corporation, insuring bank deposits.
Trading of securities by bankers much like the current financial crisis were blamed for triggering the real estate collapse and the 1929 stock market crash that caused the Great Depression. Millions of homeowners lost homes to foreclosure, but estimates of just how many weren’t kept during the time.
The Bank of the United States, the modern equivalent of Bank of America failed in 1930. The failure was related to the development of artificially manufactured mortgage market conditions created to inflate the number of mortgages written.
History repeated itself almost identically in the current crisis as Wall Street traders sold record numbers of derivatives on Wall Street as mortgage backed-securities, artificially inflating the number of mortgages available to consumers. The run on the mortgage market resulted in the foreclosure epidemic and the economic crisis faced today.
But these days instead of people taking their deposits out of banks, tens of thousands of homeowners are walking away from mortgages on homes, what for many was the modern equivalent of a savings account. Government actions are credited with halting a melt down of the nation’s economy. Ten government orchestrated moves have been taken to aid ailing real estate markets, but the financial crisis still looms with few severe government actions to bring about an end to bankers drive for record profits.
Congress is debating new financial reforms. In announcing a call for new restrictions on the size and scope of banks and other financial institutions, President Barack Obama is working with Congress on a series of reforms to rein in excessive risk taking by bankers. The proposal would eliminate the possibility of a bank investing in or sponsoring a hedge fund or private equity fund blamed for much of the financial crisis.
The White House plan would also limit the size of banks and other financial institutions in an attempt to eliminate institutions that are Too Big to Fail, placing “broader limits on the excessive growth of the market share of liabilities at the largest financial firms.”
Like in Roosevelt’s time, swift social and economic change could make a difference in today’s financial crisis. But a year into Obama’s presidency anything is less than swift to produce change in the economic system that chills the nation.
This post has been republished from Housing Predictor. You can also view this article at Housing Predictor, a real estate analysis and forecasting site.