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 It’s Time for Prudence in Banking, (and in Government)

     by Alex Lafayette

 Dear Readers,

    I wish to bring to your attention the need for the passage of the Return to Prudent Banking Act of 2011, which now has been referred to Committee within the House of Representatives, and whose key sponsor has been Marcy Kaptur. This is known in the House as bill 1489.

    The need for a concrete separation between investment banks and commercial banks, separating these functions so that no bank can do both, was highlighted in the financial fiasco of the crash and subsequent ‘bailout’ of the banks in the year 2008. This bailout was a gift from the Federal Government, to the banks in question, to the tune of one trillion dollars.


   The dooming behavior of the banks functioning both as commercial banks and investment banks, was that they invested their clients’ money into the derivatives market. The definition, however, of a derivative, is that of a fictitious asset based on the speculated future price of a commodity. When the speculated future price of a commodity-- let’s say coffee-- doesn’t end up amounting in dollars to the actual future price, that derivative bet is a failed bet.


   Therefore, we can easily see that the derivatives market in general, is a house of gambling. The problem arose with this gambling, when the ratio of derivative assets to real, non-fictitious assets became too high. As was entirely possible under this system, the bets didn’t pay off and became debts of said banks rather than dollar gains; the banks failed and had to be rescued using the money of the federal government, which belongs to its citizens. The commercial banks involved in the derivatives market, had to repay their customers who invested their money into these banks through savings accounts, money market accounts, and other financial products, and had no other money left to use except that of the people of the United States.


   Under the rule of H.R. 1489, commercial banks will not operate as investment banks. Inversely, investment banks will not operate as commercial banks. This way, investment banks which lose money in the market, would not qualify to be bailed out in the future, because they would have no obligation towards consumers invested in the form of aforementioned financial products.


   At a time when our individual States are facing extreme budget shortages, and having to make cuts in the areas of first responders and schools, it is of tantamount importance that no bailout ever occur again. Simply stated, the money of the Federal Government belongs to Us, the People.