Blog | Paper Assets

Nothing New Under the Sun

In Conspiracy of the Rich: The 8 New Rules of Money (COR), I wrote about how many of the problems causing our current financial crisis come from the repeal of the Glass-Steagall Act in 1999. The Glass-Steagall Act forbade commercial banks and investment banks from combining to co-mingle funds from savings accounts, mortgages, and business loans in high-risk investments like mortgage backed securities and derivatives.

The reason the repeal of the Glass-Steagall Act caused much of today's problems is because it allowed for banks to take on greater and greater risk with other people's money—your money—by investing savings into high-risk investments. These high-risk investments became larger and larger, and more intertwined. When they all came crashing down, they brought the banks down with them.

Biggest Heist in History

The repeal of the Glass-Steagall Act was one of the biggest bank heists in history. If you recall, there are two types of bank robbers: those who rob banks from the outside and those who rob banks from the inside. This was the greatest inside job ever pulled off and showed the power of the Conspiracy in full force because it revealed the inbred relationship between the government, the Fed, and the ultra-rich Wall Street bankers.

Senator Phil Gramm helped repeal the Glass Steagall Act. As I pointed out in COR, it's interesting to point out that Senator Gramm, the then Chairman of the Senate Banking Committee, received $2.6 million in campaign contributions from the banking, mortgage, and insurance industries. Also at the helm and pushing this upheaval were Fed Chairman Alan Greenspan, President Clinton, Robert Rubin, Larry Summers, and today's Treasury Secretary, Timothy Geithner. Once the act was repealed it led to the formation of Citigroup, of which, coincidentally, Rubin became the chairman immediately after it was formed.

As we all know, Citigroup is at the heart of today's problems with the economy, as were many other corporations that either crashed or were bailed out with taxpayer money. These corporations would never have existed under the Glass-Steagall Act.

Nothing New

What many people don't realize is that the conversation to overturn the Glass-Stegall Act began long before it was actually overturned in the late 1990s. As The New York Times points out in a recent article entitled, "Paul Volcker Pushes For Reform, And Regrets His Past Silence,": "The gradual unwinding of those regulations began in the 1970s as Mr. Volcker rose to prominence, first as president of the Federal Reserve Bank of New York in 1975, and then as Fed chairman."

According to the article, it seems Paul Volcker has some regrets. Most notably, he regrets not say anything against the unwinding of Glass-Stegall even though privately he was opposed to it.

The question becomes why did Volcker keep silent? According to him, "It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well. But eventually things blew up." Translation: no one would have listened. Warren Buffet famously called derivatives "financial weapons of mass destruction." And as Volcker says, things have blown up thanks to banks mingling savings money into investment accounts for risky investments like derivatives.

Just as over a decade ago, Volcker is again in a position to influence regulatory matters in the US as the Senate debates a House financial reform bill. To some extent, Volcker has had his say with the Volcker Rule, which as originally drafted would have banned commercial banks from risking their own funds in risky investments—similar to the Glass-Steagall Act.

But as the old saying goes, there is nothing new under the sun. And today, just as during the repeal of the Glass-Steagall Act, Volker is speaking softly. Since his rule was included in the financial reform bill, it's been altered and watered down. Volcker even admits that it contains a potentially dangerous loophole. According to The New York Times article, "Instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3 percent of their capital in such funds, so long as the fund is 'walled off' from the bank in a separate subsidiary…such a loan, if sizable enough, could endanger the bank if the hedge fund should fail."

Yet, despite this, Volcker is backing the bill. Why? "The thing went from what is best to what could be passed," he says. My translation: You can't fight the system.

Don't Fight the System

Volcker knows all too well that the Conspiracy is in control. In the end, it's not the government that has the power. It's the Fed and the ultra-rich banks. This latest financial reform bill is simply a way to pacify the voters and make the government look like it's doing something. The fundamental problems that caused the crisis are still in place—and the people responsible are still in power. The boom and bust cycle will continue as it always has since Nixon took the dollar of the gold standard in 1971.

This is why I wrote in COR that it’s pointless to fight the system. Instead, you need to learn to play by the rules of the rich—The 8 New Rules of Money. You cannot expect the government to bail you out. They only do that for powerful banks and corporations—and they use your money to do it. Counting on the government and regulation to save you and the country sets you up for disappointment and failure.

Only by educating yourself about money and taking control of your financial future by playing by the New Rules of Money will you be able to prosper. The game is always tilted in favor of the rich and powerful. But you can choose to opt out of the old rules and prosper by understanding how the world and money works, just like the rich do.

Many will be wiped out by the coming depression. But I want to see you win. Continue your financial education and understand the rules of the game. Only then can you prosper as others perish.