My college senior year thesis was done on generational theory. That subject has long held my interest because I believe that despite huge advances in technology, medicine, science, and the general improvement in lifestyle over the centuries mankind is still driven by the same human nature from the very start of human existence. Basic human nature of sinful pursuit is only tempered by a faith in God and the enforced laws of man. This is the basis of our American constitution that this human nature must be held in check by laws and that the only way for self government to survive is to have equal power in three separate branches of government. So far it has worked, but we will see.
Anyway this generational theory accepts that about every four generations, or eighty years, we repeat the same mistakes since the people who made the mistakes have passed from the scene. So today we are dealing with similar problems from the early 1930's. I expect about now you see where I am going since we indeed seem to be in a time warp with financial institutions, unemployment, and economic problems. One of the biggest problems today are banks and the fact that our economy simply does not function well without solid banks which can make loans to customers.
Banks were a problem back 80 years ago as well and many went under due to bad loans and most importantly they got into doing business in areas they should not have been at all. Banks were lending money for speculation on stocks and other risky areas of business. This led to what is known as the Glass Stegall act which limited what businesses banks could do and added the Federal Deposit Insurance Corp. to protect savers. Frankly this was good policy except for some over the top provisions such as control of interest rates. The act also made it illegal for banks to serve as what are commonly known as investment banks and regular banks at the same time.
As time went by some of the provisions were weakened such as the interest rate provision in 1980, which were good. But things started going wrong in 1999 when the wall between investment banks and regular banks was repealed. It took about one decade to lead us to the same problems they had in the early 1930's and we got the 2008 financial crisis. Again, we forgot what and why people made the laws 80 years ago. This led to us passing Dodd-Frank Financial regulation law which as in the 1933 Glass Stegall act was over the top regulation. If I could find a way I would place a long term bet for my great grandchildren that around 2090 we will be repeating this mistake again. They would be rich.
Frankly the problem here is that banks need to be treated like electric utilities, fully regulated and allowed to make a reasonable 10% to 12% protected profit. I also believe our current banking environment has banks that are too big. Many have lost contact with customers and that is one reason we had so many bad loans. We also should require banks to keep in house every loan they make, service it and retire the debt themselves to be loaned again. All these are in return for the protection given savers via FDIC. Unfortunately Dodd-Frank is the death bill for small community banks with their over the top regulatory rules. This is due to the lobbying power of the big money center banks who also make big political contributions mainly to Democrats. Oh, Republicans get in on the action too, just right now they are not in power.
If you would like to consider investing in banks as they should be consider the banks in Canada, which did not change their laws and did not deal with the financial crisis like the US. The Bank of Nova Scotia is an excellent example of a bank that does business correctly, symbol BNS. But almost any bank in Canada will do nicely.
Banks as utilities would also allow investors to buy into the banks with the knowledge of knowing they might not make huge gains, but would get nice regular dividends and that would make banks widows and orphans stocks again. There was a time in the 1980's and early 1990's when that was the case. Maybe about 2060 the generations alive then will get those few years with banks being what they should be.
I currently own GS as a option and long.
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