Laws could hinder recovery
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It was back to the 1930s last week with President Barack Obama’s proposals to place limits on the size and banking activity of US banks to reduce risk-taking. Many banks have slammed the move as a return to the days of the Glass-Steagall Act, the 1933 measure that limited banks’ ability to speculate. But would this be a bad thing?
The Act was repealed in 1999 and many argue that getting rid of the separation between the utility part of banks and the casino investment side was the ignition that resulted in the credit crunch.
You can see why Obama has taken the stance he has. The banking crisis of 2007 was a financial disaster that almost brought down Western capitalism. Strictures need to be in place for the same thing not to happen again. Plus, the American public, increasingly jaded by the Obama administration, will no doubt respond positively to further banker bashing as a sign of the ‘change’ they were promised.
But if banks are further constricted by what they can invest in it could have a knock-on effect on a variety of firms, from hedge funds to private equity firms and further constrain funding.
Prospective new lenders, some of whom as Mortgage Strategy revealed last week are finally starting to put their plans into action, have had to search high and low for sources of fresh funding as it is.
With the securitisation market still thawing, any origination of loans is hampered by having no market to sell them on.
Until this changes the market will continue to be hampered by a lack of competition. Gratifying as it may be to permanently neuter banks, any law that inhibits global recovery could be more a case of cutting off the nose to spite the face.
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