Is another bubble coming?
There's a long way to go, down, for these mortgage-backed securities. A lot of the banks, the Federal Reserve and the government still own billions and billions of dollars worth of them. And they're recognizing that at par or face value, the reality is they're probably worth five or ten cents on the dollar. So eventually, there's going to be some kind of reckoning. Meanwhile, the banks and the government are together artificially propping up the market.
You night have heard about quantitative easing. Right after the election, the Federal Reserve printed $600 billion new dollars basically to buy stuff; they're buying mortgages; they're buying treasury bills, and that is propping up the market value of these securities. It's making people on Wall Street feel richer, and so the idea is that they will start spending more, and this will help the economy. The more yachts and high-end jewelry we can sell to these super-privileged folks, the more jobs we can create. Problem is, the overall situation is bubble-like: there's a huge mass of overvalued stuff (various financial instruments) out there that moneyed people are getting themselves into, and when that bubble collapses, it's going to be ugly for all of us.
How to stop the thievery
There are a lot of solutions out there that make sense. And a lot of them were proposed during the argument over Dodd-Frank, the Wall Street Reform Bill. The most important one was the Brown-Kaufman Amendment, put together by Sherrod Brown and Ted Kaufman. They proposed the mandatory breakup of companies whenever they exceed a certain size, specifically when the revenues of any given company exceed 10% of all nationwide bank deposits.
Why do we have to break these companies up? Because our biggest problem is this too-big-to-fail issue -- it places government in a position of being subservient to these companies. Also, when they get that big, they have no incentive to behave responsibly because they know they're going to get bailed out, by the taxpayers and "their" government.
The other problem is that when you have a too-big-to-fail company, it allows them to borrow money more cheaply. Why? Because if you're the Fed and you're lending to two banks, one that is too big to fail and one that isn't, the one that's too big to fail knows, and you know, that it's going to get its money back. Why? Because the government's never going to let it go under. Therefore, you'll charge Goldman Sachs less than you'll charge your local bank. That gives them an inherent competitive advantage. Cost of capital is everything in banking, so these companies are going to get bigger and bigger, while small banks are going to get smaller and smaller, so the problem will get ever worse. Therefore, breaking up the biggest banks is the most important thing we have to do.
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