Bailout is proof that history can repeat its failures SEPTEMBER 26, 2008 http://www.news-leader.com/apps/pbcs.dll/article?AID=/20080926/OPINIONS02/809260309/1006/OPINIONS In December 1930, the Bank of the United States, a then-large New York mega-commercial /investment bank, failed. A "commercial" bank takes in deposits and lends money. An "investment" bank deals in securities, speculation, and mergers (e.g., Lehman Bros.). Between 1929 and 1933, 10,000 (40 percent) of America's banks failed. In 1933, FDR signed the Banking Act of 1933 sponsored by Republican Senator Carter Glass (the Glass-Steagall Act). Glass-Steagall prohibited commercial banks from engaging in investment banking (speculation). In the 1980s, deregulation of the financial sector began. In 1982, the S&Ls were deregulated. Between 1986 and 1995, more than 1,000 S&Ls failed. No one apparently learned anything from that debacle. In 1999, Bill Clinton signed the Gramm-Leach-Bliley Act sponsored by Republican Sen. Phil Gramm (now with the Swiss mega-bank UBS). Gramm-Leach-Bliley was supported by Clinton's then-Treasury Secretary Robert Rubin (now CEO of mega-bank Citicorp). Gramm-Leach-Bliley gutted Glass-Steagall and removed the 1933 firewall between commercial and investment banking. In 1950, manufacturing was 29.3 percent of our Gross Domestic Product (GDP) and financial "services" including banking/securities was 11 percent. In 1970, manufacturing was still 23.8 percent and financial services were only 14 percent of our economy. Hence, 38 years ago much of our wealth came from creating tangible products. By 2005, however, manufacturing was only 12 percent of our GDP and financial services was 20.4 percent. Since the '70s, many of our good manufacturing jobs have moved overseas. Now we create more of our apparent wealth by creating and moving paper/electrons than by manufacturing goods. Much of the real wealth is now being created in China -- which also owns much of our paper (coincidence?) Since 1999 (when the Glass-Steagall firewall was removed), how have the banks been "creating" this "wealth?" They package individual loans into bundles and "for a fee" (read, create so-called wealth) and sell pieces of the new bundles back and forth as investments. They give these investments fancy names like "mortgage backed securities" (MBSs), "asset-backed securities" (ABSs) and "collateralized debt obligations" (CDOs). Why are the mega-banks now failing? When someone buys a MBS, ABS or CDO, they are just speculating (read: gambling). The removal of the Glass-Steagall firewall between banks that lend and banks that speculate has morphed the mega-banks into mere casinos. No real value has been added or created by their bundles; hence, no one can figure out what the bundles are really worth. The result? No one wants the bundles on their balance sheets anymore--and the taxpayer will now buy them and take the hit. Part of the solution? First, prohibit the bundling. Second, put back the firewall between banks that lend and banks that speculate (so the next round of alphabet speculations won't again kill lending). In other words, bring back the Glass-Steagall Act (the Mega-Bank Buster).