Oops Arjay, this is what you will find, if you search Wiki for
information about the Glass Steagal Act:-

*The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate*

So it was the republicans, who controlled both houses as they hounded
Clinton about a blow job, who pushed it through Govt.

But that was not the cause of the GFC. Banks like Wells Fargo and
other serious US banks, were not involved in the subprime scandal,
investment banks certainly were. So were ratings agencies. They
turned lead into gold, all under the noses of the regulators, who
did not give a hoot, as Bush/Cheney thought that they would
regulate themselves. HA!

Your hero was part of the republican team which can be blamed for the scandal.

Please, Yabby, don't confuse Arjay with facts.

>>The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate<<

You know how it upsets him.

I was enjoying his side-trip into the mystical hinterland of Ron Paul's gonzo politics.

As well as Ron's desire to turn back the clock to the halcyon days of the gold standard, he wants us to believe in a young earth.

"I think that there, it's a theory. It's 'the theory of evolution.' And I don't accept it, you know, as a theory... I think that the Creator that I know created us and every one of us, and created the universe, and the precise time and manner"

http://liberalvaluesblog.com/2007/12/22/ron-paul-backs-creationism-denies-evolution/

I particularly enjoyed the blogger's comment that:

"There are two general characteristics of the group which spams the internet supporting Paul: 1) they tend to follow their leader and lack the ability to think for themselves and 2) they are intolerant of the views of others and will spread their beliefs regardless of how absurd they are."

Ron Paul is an illusionist, with his most successful illusion being that he understands finance. He doesn't, at the most fundamental level, which is why his ideas attract those who are convinced that a cabal of elites is guiding our lives.

It simply strengthens my theory that deists and conspiracy theorists have more in common than they realize.

>>Both of you won't face the fact that the creation of money via the fractional reserve system is theft by stealth.<<

Arjay, when a system such as the fractional reserve system is not secret, how can its activities be described as "theft".

Let alone "theft by stealth".

Nothing "stealthy" about it, I'd say.

Peter Hume - Abe LIncoln issued fiat money during the civil war. The notes were called "greenbacks", and carried no burden of interest. Lincoln thought it is a government's duty to provide citizens with a stable medium of exchange. He did not have to specify the structure of prices, only the face value of the money. He was about to embark on banking reform when he was assassinated. Idiots then withdrew all the greenbacks and triggered a post-war depression. Fiat money is perhaps not the best way to introduce non-interest-bearing money, but it's one way and better than what we have.

Also, I could have said we need not only clear definitions but plain English as much as possible, not jargon like specie and fiduciary media.

Forkes - I don't know where banks "hide" all their profit. I don't think they do. They are regularly among the biggest "earners" in the economy. The financial sector as a whole accounts for 30-40% of profits. If it were simply the service sector it ought to be, those profits should be more like 5% of all profits.

Fickle - just because many people confuse money with the value it stands for doesn't mean we can or should fail to make the distinction. I often have trouble following your arguments, and it's because I'm not sure what your words mean or which concepts you refer to.

Arjay – I agree with your general sentiments but not your particular ideas. Ron Paul and many others don’t understand that money doesn’t need to be backed by a commodity. Even if it did, why would you choose gold, whose price is unrelated to practical use, and fluctuates according to whims of fashion and speculation?

Yabby, Pericles - debt involves risk and massive debt involves massive risk, so another $trillion of debt does matter. Pericles has persuaded me that banks make less profit than I implied from money created out of nothing, but fractional reserve still creates fundamental problems:

First - the incentive is to maximise debt, as Steve Keen argues. There are sensible proposals for monetary systems that minimise debt.

Second - the fractional reserve requirement acts as a magifier of fluctuations. If defaults cut into reserves, then the money supply shrinks by $10 or more for every $1 of reserves used. In other words fractional reserve is highly destabilising.

Third, and most fundamental – it entangles the money supply with investment. This is why a Wall Street crash has such a devastating effect on the whole economy, instead of just affecting those directly involved in the stock market. Why should the failure of someone’s “investment” interfere with everyone else’s business as usual?

And, in Arjay’s defence, Clinton had to sign the Glass-Steagall act for it to come into effect. And that act certainly encouraged the blowout in obscure debt instruments that led to the crash. So he certainly had a hand in creating the mess.

Fickle – Louis Kelso is also the developer of ESOPs – employee stock ownership plans – in the US. There were, some years ago about 1500 employee-owned companies in the US, including United Airlines. J. R. Gates, The Ownership Solution, 1998.

I don't believe that it is the norm to blame the car, for a car crash, Geoff Davies.

>>... but fractional reserve still creates fundamental problems<<

Sure, there are occasions when the car itself has a fault that causes the problem, but the vast majority of accidents are caused by people.

So it is with our financial system.

Sometimes the system itself will exacerbate problems. Much as when a car cannot stop in time because the brakes are not designed for the speed the vehicle was travelling. Speed was the primary cause, but the inadequacy of the system (brakes) in that particular situation made the problem worse.

But to blame everything on the system itself is to confuse cause and effect.

One cause of the financial chaos was fundamental abuse of the financial system by whiz-kid PhD mathematicians, who thought they had discovered a surefire way to create a win-win financial scenario, using sophisticated risk-management tools.

The problems came when the classification of the underlying risk was found to be somewhat, ah, optimistic.

Once the baseline assets were exposed, the entire edifice of structured financial instruments related to those assets crumbled.

Which is, actually, the system being true to itself. You cannot over-gear, without incurring penalty.

>>the incentive is to maximise debt, as Steve Keen argues<<

"Maximise" is a misleading term in this context. It could be read to mean that the more debt you create, the better, when clearly there will always be a point at which extending more credit is intrinsically hazardous.

>>it [the fractional reserve requirement] entangles the money supply with investment<<

How so?

If you are suggesting that one should never borrow in order to invest, that would be prudent - if perhaps excessively cautious - advice.

But the two systems are not joined at the hip.

Incidentally, the tax man in Australia loves ESOPs. It enables him to tax early, and tax often, which he loves.

Employees, on the other hand, can find themselves saddled with a tax bill for gains they have not been able to realise.

Tough love, courtesy of your ATO.

Geoff Davies, your contribution identifies a number of salient points. For perspective, it is significant the US is the only western economy that may successfully apply ‘quantative easing,’ [QE] relevant to value of the greenback still the constant exchange rate benchmark. Although implementation of QE, relevant to the expenditure multiplier factor, may only be observed to exascerbate the problem especially in risk analysis of the long term.

As you accurately articulate, the clear potential risk from fractional reserves is both their default rate impacts, magnifying fluctuations, and their entanglement with the money supply of investment.

[Pericles, the default rate impact is the unacceptable risk factor attendant of this issue, consistent of that risk factor exemplified of your further example]

The Clinton era is recorded of an economy marked by fully funded policy that focused upon avoidance of debt. It may be observed then, he may have signed Glass-Steagall, but he hardly encouraged the blowout of obscure debt instruments that led to the crash. A chicken and egg argument perhaps, for perspective is required.

As of the example Yabby articulated earlier, 1% profit observed by Westpac, may on the face of it not be observed excessive, however within context, when such profits significantly accumulate to representation of 30 - 40% of the financial sector, and a Westpac share is trading around $40, those factors need to be given due consideration of their weight.

Leaning on that sector will not achieve the desired result, it will simply take its kings ransom and move elsewhere. However, hypothetically, policy instruments may be implemented to apply leveraged pressure on its shareholders, toward their more astute and prudent consideration of their responsibilities as corporate citizens, relevant to their long term vested interests. Such policy may coincidentally provide more stability to the market as a positive corporate example.

Continued