The 1929 stock market crash was caused by lax lending standards and excessive leverage.  The Glass-Steagall Act was passed in 1933 in an effort to prevent other crashes moving forward.  That act separated commercial banks from security firms.    The thought process in separating banks from security firms was that security firms (which use leverage) take risk in the securities markets that should be borne by investors in securities firms, not by bank depositors who are federally insured.  The Glass-Steagall Act was repealed in 1999.  This repeal allowed banks to get back into the investment banking and securities business.  It took less than 10 years to show that this was not a good idea.    

     The 2008 financial crisis was very similar to the 1929 stock market crash in that it was brought about by relaxed lending standards and excessive leverage.  This was in large part due to the repeal of Glass-Steagall.  As a result of this crisis, we believed something needed to be done to address this problem so that it would not happen again.  In our opinion, Congress should have voted to reinstate the 37 page Glass-Steagall Act.  Instead, Congress passed the 3,200 page Frank-Dodd Wall Street Reform and Consumer Protection Act.  Part of the act includes 243 rules that need to be written by regulators.  To date, 150 rules have been written over the past three years that encompass over 14,000 pages.  In our opinion, more complicated laws are not the answer and will only cause problems in the future.  Milton Friedman wrote in his essay Why Government is the Problem, “In part because there are so many laws to break: and the more laws there are to break, the harder it is to prevent them from being broken, not only because law enforcement means are inadequate but, even more, because a larger and larger fraction of the laws fail to command the allegiance of the people.”  

      What does this mean for consumers?  The borrowing rules have changed and it is more imperative now to have a stellar credit record if you want to obtain credit.  For example, getting a mortgage next year will become more difficult for many borrowers.  As part of Frank-Dodd, a new agency called the Consumer Financial Protection Bureau (CFPB) was created to protect consumers.  This agency is instituting new rules for borrowing that will make it more difficult for those with irregular income to obtain a mortgage.  So, those people that have had a career disruption, divorce, or volatile income – small business owners and independent contractors – will have a harder time getting or refinancing a mortgage.  Retirees who have adequate savings, but not much current income, will also have trouble refinancing or getting a mortgage.  The pendulum has swung from one extreme – being approved for a mortgage over the phone – to the other and the CFPB is actually making it harder to borrow and lend (fines levied against banks make them hesitant to lend).  If you are looking for a new home or to refinance a mortgage, and you are a retiree, have irregular income or are recently divorced, we suggest you consider doing so this year.   

Next few weeks

     The markets over the next few weeks will be dominated by headlines.  Likely news items that will impact the market include the election in Germany, the Federal Reserve meeting and the potential tapering of QE III, and budget talks – the debt ceiling needs to be raised next month.  We would not be surprised to see volatility on the rise in the financial markets over the next several weeks.

Sincerely,

Your THOR Team