The crash of ’29 was exasperated by investment bankers leveraging peoples mortgages and savings… this led to bank failures, people losing all their savings.
Plus having no FDIC to provide a backstop.
In ’32, G-S mandated that banks keep their Investment Bankers (swashbuckling gamblers) away from Retail money (managed by staid conservatives and actuarial tables).
This was not the problem that turned 1929 in the Great Depression. I would recommend the following reads. The first explains how the investment banks had all exited the capital markets in the SPRING of 1929…
And of course the people who, 30 years later, figured out how and why the Great Depression actually happened:
Banks began offering Mutual Funds…..
That’s simply wrong. You’ve got it all confused. Here’s how it worked:
- G-S regulated retail banks, not investment banks.
- As to two of your allegations, mutual funds, when they tank, do not affect the issuer of the mutual fund; the stockholder takes 100% of the loss. Further, the retail banks were not writing insurance; that would have been prohibited under state insurance regulations.
- The financial supermarkets that were enabled by the end of G-S were selling OTHER company’s mutual funds and insurance products, not their own. Ergo, retail deposits were not at risk from those activities.
- It was the investment banks that packaged the mortgages into CDO’s and sold them as AAA rated bonds.
- At the same time, the investment banks and some shrewd investors hedged those CDOs with CDS’s that were underwritten by AIG.
- When interest rates were raised in 2007, this caused a reset in the base interest rate of all those crap mortgages that were tied to an underlying rate. This was not unexpected, but in order to survive, the holders of those mortgages had to roll them over; however, the marked had peaked, prices had dropped, and there was no way to roll them over. They started to go into default.
- As they went into default, the issues held by the investment banks, which had to be marked to market each day, started to tank. This sucked all their cash and broke them.
- Retail banks, which have *always* written mortgages (that much was permitted under G-S and after) saw their mortgages go into default, sending the less well capitalized banks into bankruptcy. The need for FDIC funds was caused by the mortgage defaults, not anything that the ending of G-S prevented them from doing.
It’s worth pointing out here that the forced separation of financial services by regulation is rare in the world. Canada, which had virtually no fallout from the meltdown at all, has always permitted its banks to engage in whatever financial services they wish (hence, for example “TD Ameritrade” where the “TD” stands for “Toronto Dominion” Bank)
But the Securities were not AAA. The banks had sold sham mortgages to millions of poor people and bundled them into the Securities they sold to the world… and when all the American poor folk couldn’t re-finance, the world went bankrupt.
On that part we agree. Let’s not forget, however, that the (investment, not retail) banks do not rate their own securities. That was Standard and Poor’s contribution to the mess.