The article says that glass steagal originally had two pieces to it. First that bank deposits are insured by the gov. Second that banks can’t use depositors money on wild investment schemes.
There are four ways to combine these two parts of the act
- no deposit insurance, banks can do what they want with depositors money. In other words, the law isn’t passed at all.
This is ideal. Banks have total freedom to make money as they wish, but if they lose it, they and their customers are screwed. This is very healthy, for it lets the banks make good profits if they are wise, but puts fear of loss in them if they are foolhardy. Also, customers keep a sharp eye on the banks, ready to pull out their money at a moment’s notice if they smell something fishy. Thus the banks will guard their reputation and investments to make sure they keep their customers.
- there is deposit insurance, and banks can do as they wish with the money. This is the situation the article bemoans, and what we have now.
Since the depositors are insured by the govt, that means if the bank just tosses the money right into the ocean the taxpayer will reimburse the customers. In other words the banks have no reason to be cautious whatsoever. And with the repeal of the second half of the original glass steagal act, they are allowed to do just that, invest in all kinds of risky gambles.
- No deposit insurance, banks cannot invest as they please. Just the opposite of the current situation.
Here the banks have the fear of God [customers leaving forever if bank fouls up] in them, and so are needlessly hindered by some unneeded regulatiuons. This kind of useless regulation is usually done to help big banks keep little guys out of the banking biz.
- deposit insurance, banks are regulated. This was the original act.
It is bad that banks can be risky and irresponsible and the taxpayer will pay the bills, and so it is good that they are at least partially limited in what things they can invest in. maybe that way they wont do the really irresponsible stuff, like they did recently when the second part of the law was repealed.
As for the jargon,the original phrase in the article is saying the same thing twice. The banks are allowed to ‘“monetize” gov’t debt’, meaning they are allowed “to use it as an asset to pyramid more credit.” OK to break it down to normal han speech:
“monetize”=pretend it is actual money
monetizing gov t debt= the banking laws allow fractional reserve banking. this means for every paper dollar a bank has in its vaults, it is allowed to write out a check for TEN dollars and give the check to someone as a loan. He has to pay interest on the ten dollars. The hope is that he will deposit the check right back in the bank and so the bank will never have to actually produce the missing nine bucks it doesn’t have. Incredibly, this has worked most of the time.
Now if the bank in the past lent the paper dollar to the US govt, then they have zero paper money in their vault. So they are not allowed to lend anyone else ten dollars anymore. But if the banks are allowed to “monetize” the govts debt, it means they are allowed to pretend that the govt owing them a dollar is the same as if they have an actual dollar in their vault, and can now write a ten dollar check and lend it to someone.
pyramid= what the law allows banks to do, i.e. to build an imaginary upside down pyramid of money. At the bottom of the pyramid is the actual money they have. On top of that is the nine extra dollars they are allowed to pretend they have and loan to someone.
monetizing government debt [by which he means]:
to use as an asset= pretending the money the govt owes the bank is money the bank actually has
to pyramid more credit= to lend more money they dont have.
It’s a wonderful book but unfortunately it doesn’t discuss about banking and money so much.