WOODIN | FDR's First Treasury Secretary Calms the Bank Panic

Will Woodin (2nd from right) examines a sheet of
greenbacks. He had $2 billion in banknotes printed
and then had Pathé News film them being shipped.

March 9, 2021—On this date in 1933, which was the Thursday after President Franklin D. Roosevelt's Inauguration, the Emergency Banking Relief Act was passed and signed. It may be some kind of legislative record. Congress was called into session with a few days' notice. The bill (EBRA or just EBA) was passed in the House in the first part of the day, in the Senate in the second part. It was then signed by the president.

It didn't go entirely smoothly. Copies of the bill didn't get to all the Members of Congress and it had to be read out in the House. Big pieces were yet to be added to what became the Glass-Steagall Act of 1933, including the deposit insurance (FDIC) portion promoted by Rep. Henry B. Steagall and supported by many (not all) of the banks and the fencing off of insured banks from investment bankers, which was Senator Carter Glass's biggest interest.

When they arrived the previous weekend, Roosevelt and his first Treasury Secretary, William H. Woodin, got to work, supported by the "brain trust" led by Professor Raymond Moley and by some senior people from the outgoing staff of the Treasury and the Federal Reserve System. Woodin and Moley were staying at the Mayflower Hotel, but they worked well into the night trying to nail down the procedures for opening up the banks after they were closed by the national "bank holiday." Banks were closed in all 48 states. 

Roosevelt left Secretary Woodin to handle the legislation and the details of reopening the banks. Roosevelt worked on his first Fireside Chat, which was delivered on the radio   on March 12, 1933. Announcing Woodin's plan to a fearful nation, he said:

The new law allows the twelve Federal Reserve Banks to issue additional currency on good assets and thus the banks that reopen will be able to meet every legitimate call. The new currency is being sent out by the Bureau of Engraving and Printing to every part of the country.

Woodin, as a corporate CEO for 15 years, handled the printing of $2 billion in banknotes like he would any deadline for one of his railcar factories. He was there and he worked late to make sure that all the shifts were cranking out the greenbacks. Woodin made sure that Pathé News was there to record the money coming off the presses and the trucks loading up and zooming off to the different clearinghouse banks.

People got back in line at the banks, this time to redeposit the money they had taken out. By the end of March, two-thirds of the money that had been taken out of the nation’s banks had been redeposited. 

GLASS-STEAGALL | Anniversary of Northern Rock

Run on Northern Rock, Sept. 14, 2007, first in
UK in 150 years. This is what Glass-Steagall
was design to prevent.

OXFORD, Sept. 14, 2017 – I'm here in Oxford for the annual Oxford Alumni Weekend. 

The lead business story today on BBC News "Business Live" at 8:30 a.m. this morning was the 10th anniversary of "the first run on UK banks in 150 years," i.e., Northern Rock. The bank was nationalized five months laters.

What has happened in the ten years since then? (1) Bank reserves are higher than they were then. (2) Retail banks have been separated from investment arms of the banks. This sounds a lot like what Senator Carter Glass tried to put in place along with Treasury Secretary Will Woodin in 1933. Rep. Henry Steagall from Alabama was pushing through federal deposit insurance for the banks and the Glass part was to protect the taxpayer.

The BBC announcer asked an expert whether the reforms are enough. The expert, a professor, who says no, that there are still too many risks.

The fear here is that the Bank of England will soon respond to good news and possible signs of inflation by raising interest rates. In the UK, that means a rise in the cost of variable-rate mortgages. Some mortgage-holders will be taken by surprise. Defaults may increase and cause insolvency among weaker financial institutions.

At least the new £10 note has Jane Austen on the back. Has the USA ever had the picture of a woman on a greenback? We were supposed to get Harriet Tubman but reports are that Trump has killed that idea.

FDR | Mar 12—First Fireside Chat

FDR Delivering a "Fireside Chat"

March 12, 2017—On this day, 84 years ago in 1933, eight days after his inauguration, President Franklin D. Roosevelt gave his first national radio address or Fireside Chat, broadcast directly from the White House.

In their way, they were as revolutionary as President Trump's Tweets.

FDR had told his Republican Treasury Secretary, William H. Woodin, that he didn't want to be bothered with the details of actions to solve the bank panic because he was going to concentrate on communicating the resolution to the public. FDR began his first address with the words:

“I want to talk for a few minutes with the people of the United States about banking.”

Columbia Prof. Raymond Moley had been serving as FDR's adviser on the banking crisis, wanted to consult with FDR at every point. He was disappointed that FDR didn't want to be involved, but the President wanted to concentrate on honing his message.

Secretary Will Woodin had been a manager and a CEO a quarter of a century and knew exactly what he had to do. He went right to work. His contribution to calming the panic has never been adequately appreciated and remembered.

The Friday before FDR's inauguration, most banks had already been closed because so many states had initiated their own bank holidays, to give the banks some breathing room as depositors were lining up to withdraw all their money (outgoing President Hoover wouldn't act without FDR's agreement, and FDR's position was that he was not going to try to second-guess Hoover until he became President on March 4).

The local scenes of panic throughout the banking system were exemplified vividly in Frank Capra's movie It's a Wonderful Life (1947), starring Jimmy Stewart as small-town banker George Bailey, who is considering suicide as he sees his depositors destroying his bank, one depositor at a time, while others not in line were desperately worried about their deposits.

FDR's first act was to announce a Federal "bank holiday" – i.e., a presidentially ordered closing of all banks – pending examination of the banks, starting with the largest ones first. The idea was that only "sound" (solvent) banks would be reopened.

Secretary Woodin knew what to do as a top manager, because he had been Chairman of a locomotive company and President of a railway car manufacturer that in 1928 were two of the 20 companies in the Dow Jones Industrial Average. He started working around the clock as if it were a three-shift factory, pushing government staff to:

• Print $2 billion more greenbacks for the banks to have on hand.
• Publicize the printing and packing of the greenbacks with filmed news clips for the cinemas, the equivalent of today's YouTube posts.
• Ensure that all the banks in the country were closed.
• Examine the banks one by one for solvency, with priority given to the largest banks.
• Reopen the sound banks.
• Take steps to close and liquidate the unsound banks.
• Prepare new legislation to prevent a recurrence of the banking crisis–the legislation being passed within months as the Banking Act of 1933, aka the Glass-Steagall Act, named for the bank-regulatory provisions proposed by Senate Banking Chair Carter Glass (D-Va.) and the deposit-insurance plan proposed by House Banking Chair Henry B. Steagall (D-Ala.).
• Prepare new legislation to provide oversight over non-bank financial institutions, which became the Securities Exchange Act of 1933.

Meanwhile, FDR worked on the public-communications groundwork for all these steps. He did not have a Twitter or YouTube outlet, or even television, but he did have the radio.

In his first radio Fireside Chat, FDR explained the closure of the banks as necessary to stop a surge in withdrawals by depositors afraid of losing their savings. Many banks would be reopening within days, FDR said, and he thanked Americans for their  “fortitude and good temper” during the period of the bank holidays.

When FDR took office, the United States was at the low point of the Great Depression, with the unemployment rate between 25 and 33 percent (the reporting of unemployment became more precise during the next decade).

The Fireside Chat got its name from radio journalist Robert (Bob) Trout, called "the Iron Man of Radio" for his ability to keep up a patter during a breaking news story when new information arrived in dribs and drabs.

FDR's purpose was to inspire confidence in himself and in the nonfunctioning banking system. While the chats sound folksy, FDR took great pains to make them that way, using simple vocabulary and anecdotes. Presidents had previously communicated with their citizens almost exclusively through journalists. The Fireside Chats were without precedent and they were effective because radios were still magical and were owned by 90 percent of U.S. households. They were the 1933 equivalent of what Tweets are in the very different America of 2017.

GLASS-STEAGALL | Bipartisan Support (Updated March 12, 2017)

Sen. Carter Glass, Feb. 1933

July 27, 2016—Andrew Ross Sorkin (New York Times, July 26, p. B1) considers it "an extremely odd political dovetail" that both Democratic and Republican platforms include planks calling for the restoration of the 1933 Banking Act, widely referred to as Glass-Steagall.

The GOP platform is not consistent. It has some anti-regulatory provisions diametrically opposed to a restored Glass-Steagall Act. But a coalition between Republicans and Democrats on major financial issues is not odd at all:

• The coalition that brought down the Philadelphia-based Hamiltonian Second Bank of the United States united Old Republicans opposed to growing Federal power and Jacksonian Democrats opposed to the reining-in of bank lending.
• The coalition that created the Federal Reserve in 1913 included Republican Senator Nelson Aldrich and several Wall Street bankers, who drafted a privately controlled plan at a "duck hunt" in November 1910, and Democratic Congressman Carter Glass of Virginia, who with President Woodrow Wilson added provisions for greater public control.
  
• FDR's Republican Treasury Secretary, the unjustly forgotten Will Woodin, calmed the financial markets in 1933 and got both houses of Congress to agree in a single day to an Emergency Banking Act and then to the 1933 Glass-Steagall Act.

When I was working as a financial economist at the Federal Reserve Board in 1964-66, Bray Hammond's history of banking was still fresh in the minds of researchers there. Hammond had been Assistant Secretary to the Board of Governors of the Federal Reserve System through 1950. He  wrote Banking from the Revolution to the Civil War (key chapter posted here) that won a Pulitzer for history in 1958.

Today's Main Street coalition has coalesced in reaction to the 2008 meltdown. It is broad and deep but it is the same coming-together that has stood the United States well since the Revolution.

Glass-Steagall was named after Sen. Glass, now chairman of the Senate Banking Committee, and Rep. Henry Steagall of Alabama, chairman of the House counterpart committee. Working under pressure from FDR and Woodin, Glass and Steagall fashioned a law that was a powerful bargain. The banks originally got deposit insurance up to $2,500 per account holder from Steagall in return for strict regulations designed by Glass to separate insured from non-insured financial institutions.

Woodin and FDR were both fully aware of the hazard that investment bankers would try to get access to insured deposits to speculate with, which is why they deeply opposed deposit insurance unless accompanied by strong regulation of banks covered by such government-backed insurance.

Deposit insurance coverage was ultimately expanded. Depositors were allowed to have different insured accounts at the same bank (retirement, joint, etc.). Coverage was raised in steps to $40,000 and, in 1980–in a move that the FDIC itself opposed–to $100,000. The increase to $250,000 was in response to the 2008 meltdown and arguably encouraged the same disregard of risk that caused the meltdown. In practice, when a small bank gets into trouble the FDIC arranges a takeover. If the bank is too big the fail or be taken over, the 2008 Lehman takeaway is that the Fed is likely to finance the bank's losses to preserve the financial system.

Meanwhile, while the regulations installed by Carter Glass lasted more than half a century. Their erosion in steps through 1999 in the name of "modernization" paved the way for the 2008 crisis.

FIX THE MIX | Missing Glass-Steagall!

Sen. Carter Glass (D-Va.) (L) and Rep.
Henry Steagall (D-Ala.).

The Democratic candidates in the last debate seemed to agree that the American banking system needs fixing.

• Sen. Bernie Sanders argued that the erosion of the Glass-Steagall wall between commercial banks and financial speculators was the setting for the 2008 financial meltdown. I think he is right on the mark, although NPR Fact Check (Jim Zarroli) questioned Sanders and Washington Post Fact Checker Glenn Kessler gave Sanders three pinocchios for saying on January 5 that "Glass-Steagall banned commercial banks from making loans to investment banking firms to facilitate their trading in the shadow-banking arena." This suggests that we need to get more of a consensus on what Glass-Steagall actually did.
• Former Secretary of State Hillary Clinton has presented a series of proposals to fix Wall Street, although she got two pinocchios for saying "[E]verybody who’s looked at my proposals says my proposals are tougher, more effective, more comprehensive" than Democratic presidential candidate Sen. Bernie Sanders’s. Fact Checker Michelle Ye Hee Lee says: "[T]he Sanders campaign has now compiled a list of 60 experts and counting, backing his plan over Clinton’s.” 

As voters, we need to understand what the argument is about. The stock market's collapse since the beginning of 2016 may be in part a sign that the slow implementation of Dodd-Frank reforms is opening up re-emergence of fear about our financial system.

We have not done since 2008 the thorough-going financial market fixup that FDR and his GOP Treasury Secretary William H. Woodin and the Chairman of the Senate Appropriations Committee, Senator Carter Glass (D-Va.) undertook in 1933.

Glass-Steagall's Goal: Fix the Mix!

An easy way to remember what Glass-Steagall did is that it was designed to Fix the Mix, i.e., to end the mixing of speculative and deposit-taking activities.

One place to begin is to remember what FDR and Secretary Woodin faced when they opened for business in Washington on Saturday, March 4, 1933.

Most banks had been closed the day before, by order of state governments. Some were bankrupt. The public was panicked about the financial markets. They were afraid that they would never see their bank deposits again. Some of them unfortunately turned out to be right about that.

Then FDR declared a "bank holiday". He closed all the banks for the coming week, and then later extended the holiday for some of the banks. Treasury Secretary Woodin personally supervised round-the-clock printing of greenbacks, complete with cinematic coverage, while teams of his Treasury bank examiners looked at every bank and decided which ones would be pronounced solvent and opened up and which ones would be closed and liquidated, with depositors forever losing full access to their funds.

Meanwhile, House Banking Chairman Rep. Henry Steagall, Democrat of Alabama, carried water for the banks. The banks desperately wanted deposit insurance to prevent future panics and reassure the public and allow the banks to get back to the business of making money. Steagall proposed deposit insurance, and eventually the law created the FDIC and got insurance, initially only up to $2,500 per depositor.

Roosevelt and his Treasury Secretary were at first totally opposed to this deposit insurance. They wanted regulation of the kind that Sen. Glass proposed, a strict prohibition against banks putting at the disposal of investment banks any of their depositors'  funds. Sen. Glass correctly worried that deposit insurance might open up complacency about how banks were investing their money. They all understood that government-enabled insurance of bank deposits would leave the banks free to speculate with depositors' funds because depositors would no longer be afraid of their bank going broke.

Roosevelt, Woodin and Glass were induced to support limited Federal assumption of banking risks in return for Steagall's agreeing to support legislation that Sen. Glass had introduced, creating a wall between banks and speculative financial institutions. Sen. Glass was seeking to protect the Federal Reserve System he had helped create in 1913, when he had Steagall's job. They were all interested in restoring faith in financial markets. At this time, Adolf Hitler was gaining ground in Germany because of the crash of 1929 and the inability of the financial markets to get back on their feet.

The Glass-Steagall Act (the Banking Act) of 1933 had two main parts. One was deposit insurance. This was gradually extended from $2,500 per depositor to $250,000 per account. The other half of the Glass-Steagall bill was regulation of securities firms and separation of investment banks from commercial banks. This that was gutted between 1950 and 2002, especially in 1999. 

Glass-Steagall was about protecting the henhouse assets of FDIC-insured banks from foxes selling speculative securities and generally engaging in risky forward transactions (futures and options). Glass-Steagall was about putting a wall between the humdrum business of taking deposits from consumers and making secured loans back to them, and the risky business of speculating in business equity and debt.

Glass-Steagall split apart two groups of financial institutions–commercial banks and investment banks. Investment banks underwrite and place securities (debt and equity) and they engage in transactions of two kinds:

• A passive role, helping someone that wants to reduce their risk. 
• An active role, entering the market with the intent of gambling. In this role, they are creating risks, and the more they disguise a deal to minimize the significance of risks in a transaction, the more dangerous their activity to systemic stability.

Glass-Steagall was designed to reduce market risks in two ways.

• It provided federal deposit insurance, which reduced the risks for both the banks and their depositors. The banks really wanted this, because when FDR took office the entire banking system was shut down by risks that went sour.
• It provided for bank regulation to limit the risk to the Federal Government.

The law was strict. No existing mixing of investment banking and deposit-taking banks was permitted by Glass-Steagall. There was no "grandfathering".

Bank Lobbyists' Goal: Add to the FDIC and Mix the Fix!

What has happened since Glass-Steagall?

For the first 50 years, the banks have sought to beef up the Steagall side, to greatly expand Federal deposit insurance. The deposit insurance half of Glass-Steagall has not been eroded; on the contrary:

• Federal Deposit Insurance Corporation (FDIC) coverage has been beefed up more than 100-fold. The limit has steadily increased from the original $2,500 per depositor to $250,000 per deposit account.
• Depositors are now allowed to have more than one covered account (sole, joint, custodian etc.), multiplying the coverage further. 
• Beyond that, the FDIC for efficiency reasons in practice avoids the costly litigation involved in liquidating a bank and instead tries to negotiate takeover over its assets and liabilities by a solvent bank, which in effect means 100 percent coverage of deposits.

Starting under President Reagan, Congress has been mixing the fix, dismantling protections put in place by FDR, Woodin and Glass in 1933, in the name of "modernization". These moves, culminating in the 1999 Gramm-Leach-Bliley Act, lowered the walls between the banks and non-bank institutions, without a corresponding increase in regulation of non-bank financial institutions. When Gramm-Leach-Bliley was passed, the Economist magazine in 1999 expressed concern that deregulating the banks without a broadening of oversight of non-bank institutions of the kind that Britain had undertaken in 1997 was inviting trouble. The Economist was right.

Requiems for Glass-Steagall

1. Warren Gunnels, Sanders’s chief policy aide, is quoted by Glenn Kessler of the Washington Post:  "[C]ommercial banks played a crucial role as buyers and sellers of ... credit-default swaps, and other derivatives. This would not have happened without the watering down of Glass-Steagall in the 1980s and the eventual repeal of Glass-Steagall in 1999."

2. Brookings Fellow Phillip Wallach  agrees that Citicorp could never have become such a megabank without Gramm-Leach-Bliley: "That is the best arrow in the Glass-Steagall revivalists’ quiver. Citibank deposits were attached to Citibank bad investments, and Citi was the Too-Big-To-Fail-iest of them all."

3.  James G. Rickards, former general counsel of the Long-Term Capital Management hedge fund which was brought down by a "black swan," agrees with Sanders that the 1999 law was a bad one and that there was an important cultural shift after Glass-Steagall was repealed. Previously, he said, such shadow-bank loans required permission from the Federal Reserve under rule 4(c)(8). "The presumption was it was illegal unless the Fed said you can do it. After Glass-Steagall, we didn’t have to ask permission, and it enabled the banks to do what they wanted."

4. Camden R. Fine, chief executive of the Independent Community Bankers of America, favors a restoration of Glass-Steagall. He notes that Lehman owned a federally insured industrial loan company (ILC) that held insured deposits: "[T]he repeal of Glass-Steagall gave both commercial banks and investment banks who owned ILCs much greater flexibility to deploy their capital and their deposit funds to whatever purposes they wished, and those firms leveraged themselves many, many multiples of times more than they would have been allowed before."

5. Former Federal Reserve chairman Paul Volcker supports the idea that eliminating the Glass-Steagall separation of commercial and investment banking allowed for a trading mentality to take hold at some banks.

6. Harvard B School Prof. David A. Moss in 2009: "[T]he success of New Deal financial regulation [may have] contributed to its own undoing. After nearly 50 years of relative financial calm, academics and policymakers alike may have begun to take that stability for granted. Given this mindset, financial regulation looked like an unnecessary burden."

7. Former Federal Reserve Chairman Alan Greenspan said in October 2008: "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief."

8. John Reed, former Chairman of Citigroup, wrote recently in The Financial Times that the Glass-Steagall wall between banks and investment banks was needed: "As is now clear, traditional banking attracts one kind of talent, […] in many important respects, risk averse. Investment bankers and their traders are […] comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organizations tend to organize and focus on products rather than customers. This creates fundamental differences in values."

GLASS-STEAGALL | Three Myths

Glass-Steagall kept speculative foxes out of the commercial-bank henhouse.

Myth #1: Glass-Steagall is too complex for ordinary voters to understand. An investment banker says: "If one percent of people actually know what Glass-Steagall did and what it would do now, it’s not more than that.”  He says the Glass-Steagall issue will not change anyone's vote.

Fact: The law was simple – that's why it worked fine for half a century.  It traded federal deposit insurance for risk-limiting bank regs. People know the 2007-2009 crisis came from deregulation.

The Glass-Steagall Act (i.e., the Banking Act) of 1933 had two main parts. House Banking Chairman Rep. Henry Steagall, Democrat of Alabama, was carrying water for the banks, which wanted deposit insurance. They got deposit insurance up to $2,500 (soon raised to $5,000) per account.

Not complicated is that the half of the Banking Act of 1933 that the banks liked – deposit insurance – is still with us. The limit to coverage of deposit insurance has steadily increased 100-fold, from the original $2,500 per depositor to $250,000 per deposit account. Depositors are allowed to have more than one covered account (sole, joint, custodian etc.). Beyond that, the FDIC for valid efficiency reasons avoids the costly litigation involved in liquidating a bank and instead negotiates takeover over its assets and liabilities by a solvent bank. This in effect means 100 percent coverage of deposits.

FDR and Treasury Secretary Woodin were initially opposed to this giveaway to the banks. They were only induced to support Federal assumption of banking risks in return for bank regulations imposed in Sen. Carter Glass's bill, which was designed to protect the Federal Reserve System he helped create in 1913. 

Myth #2: Glass-Steagall was eliminated in 1999.
Fact: Only half of Glass-Steagall was gutted, the Glass part.

The Glass-Steagall law was simple. What was complicated was the piecemeal and devious dismantling by its opponents of the Glass component of the law, in the name of "modernization".  

The deregulatory moves culminating in the 1999 Gramm-Leach-Bliley Act kept the Federal deposit insurance and took down the wall between insured banking and speculative issuance of securities.

Harvard B School Prof. David A. Moss in 2009 put it well: [T]he success of New Deal financial regulation [may have] actually contributed to its own undoing. After nearly 50 years of relative financial calm, academics and policymakers alike may have begun to take that stability for granted. Given this mindset, financial regulation looked like an unnecessary burden. It was as if, after sharply reducing deadly epidemics through public-health measures, policymakers concluded that these measures weren’t really necessary, since major epidemics were not much of a threat anymore. [My italics.]

Former Federal Reserve Chairman Alan Greenspan said in October 2008: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.” Nothing too complicated about this story. 

Myth #3: Glass-Steagall was about the big banks. Hillary Clinton: "[In my proposed bill] I go after all of Wall Street, not just the big banks"
Fact: Glass-Steagall was not just about the big banks. It was about all FDIC-insured banks. It was about protecting the henhouse assets of all insured banks from foxes selling speculative securities.

Glass-Steagall was about putting a wall between the humdrum business of taking deposits from consumers and making loans back to them (the henhouse), and the risky business of speculating in business equity and debt (the foxes, or wolves).

John Reed, former Chairman of Citigroup, wrote last week in the Financial Times that he has come to the view that the wall between banks and investment banks was a good one.
"As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values."

BUBBLES | Which Candidate Best Understands Them?

Bernie Sanders wants to bring back Glass-Steagall; Hillary Clinton does not.

Pam and Russ Martens argue that Sen. Bernie Sanders showed in the debate on Tuesday the best appreciation of the causes of the 2008 financial meltdown, the risks remaining today. and what to do to regulate the financial markets.

The Martenses say that Hillary Clinton does not understand that Dodd-Frank gives power to the regulatory agencies to break up large banks.

They are impressed that Sanders opposed the 1999 teardown of the Glass portion of the 1933 Glass-Steagall Act, back when it happened. (The wall between commercial and investment banks was torn down, but the insurance of commercial-bank deposits proposed by Rep. Henry Steagall is still in place.)

Sanders wants to bring back the wall created by Senator Carter Glass (D-Va.). Hillary Clinton does not.

Although Sanders calls himself a Democratic Socialist and calls for revolution, what he is saying fits what the London Economist Magazine said in 1999. I pointed out the Economist position in Huffington Post in 2008.

Swan Song from Floyd Norris on the Financial Foxes

Floyd Norris, Leaving NYT

Floyd Norris, the chief financial correspondent and business columnist for The New York Times, accepted a buyout and is exiting The Times today. A brief note says simply: "This is Floyd Norris's final column for The New York Times."

His departure is part of a reduction in editorial-side staffing of 100 positions, the fourth round of reductions since 2008.

His swan song, after 26 years with the newspaper and 15 years in his current position, is about the financial foxes (not his words), the people who take risks with our money and want taxpayers to bail them out when they destroy the financial system.

His opening question is: "What happens when you turn over regulatory responsibilities to people who think there is really no need for regulation?"

The question answers itself - regulation becomes lax.

In case you were wondering what specific case Norris had in mind, his column, "High & Low Finance", goes on immediately to talk about Alan Greenspan, a disciple of Ayn Rand who described himself as a "market fundamentalist" who believed "markets were far smarter than governments" and should be left alone to do their work. The term "market fundamentalist" has since the financial meltdown of 2008 become, he says, a term of derision.

Greenspan was made Chairman of the Board of Governors of the Federal Reserve System. I used to work for the Board of Governors as a financial economist when the Chairman was William McChesney ("Bill") Martin, Jr.  His most famous quote, repeated by Norris, is that the Fed's job is like that of a chaperone who orders the punch bowl removed just as the party is really warming up.

Greenspan let the punch bowl stay in place until the place was trashed.

As he surveyed the wreckage from deregulation, Paul Volcker, another former Fed Chairman, summed it up well in 2009 when he said, as Norris quotes:

The most important financial innovation that I have seen the past 20 years is the automated teller machine. 

Comment

It is sad for me to see Norris take so much knowledge with him out of The New York Times, especially since I like the thrust of his swan song.

Janet Yellen is more like Martin than Greenspan, seeing the Fed as having a big job to do not just in controlling interest rates to influence the pace of economic growth, but also - and, in her view, independently - regulate the financial system on a targeted basis to control the risks from too-big-to-fail institutions and from institutions that have been engaging in risks that are far beyond their capital adequacy to absorb.

But the regulatory system we were left with after the go-go Greenspan years is not something we can be comfortable with. During the era of weak financial regulation, the shadow banks - risk-taking sparsely regulated investment banks - were at work leveraging their capital.

This has happened before. After the crash of 1929, the Federal Reserve was paralyzed (the only person who understood what should be done, Benjamin Strong, died the previous year). Eugene Meyer, the head of the Federal Reserve System, wrote a long memo to President Hoover explaining in well-written prose why the Fed didn't have the power to do anything at all. Hoover tried to impress on FDR that the three biggest financial problems facing the country in 1933 were inflation, budget deficits (at all levels of government) and excessive government spending.

FDR wasn't much interested in financial matters and he turned it all over to his team headed by Treasury Secretary Will Woodin, a Republican business executive who came out of the railway rolling-stock manufacturing business. It is remarkable what a great job they did, restoring confidence in banks in a few weeks, performing stress tests on each bank via Treasury auditors before it was reopened (some were not), producing $2 billion in new currency notes by working the Bureau of Engraving and Printing overtime and filming the trucks going out to different cities so that the public could see in their movie theaters that cash was on the way.

Most important, in 1933 FDR's team - with Senator Carter Glass and Rep. Henry Steagall - created a Federal Deposit Insurance Corporation to insure bank deposits and, in return for this gift to the commercial banks, a system for protecting taxpayers from the risk that shadow-banking foxes might speculate with insured deposits. Amazingly, the system worked pretty well for 70 years despite the constant chipping away at the protected henhouse of insured commercial banks by the financial foxes who wanted access to insured (and therefore risk-blind and cheap) deposits.

When the market fundamentalists get to meet their makers and they ask God why She didn't warn them about the possibility of a global financial meltdown of the scale of 2008, I can imagine the reply: "What do you mean? I gave you the Savings and Loan Disaster, Long-Term Capital Management, Enron, Global Crossing, WorldCom... None so blind as will not see."