The primary conclusion of the Pujo Committee in its 1913 report was that there existed a "money trust" that had a community of interest that exerted control over American industry through interlocking boards of directors and modulating the access to credit. The Pujo report ultimately led to the Federal Reserve Act of 1913, which some proclaimed would break the money trust through government oversight.
A major conclusion of the Pecora Commission of 1934 was that nothing about the "money trust" had changed, that, if anything, it had become more brazen in its abuses since the passage of the Federal Reserve Act. Unlike the Pujo Committee report, the report of the Pecora Commission led to major legislative reforms including the Glass-Steagall Act, which barred investment banks from operating as commercial banks, and vice versa.
Although the Glass-Steagall Act was not repealed until 1999, the financial sector had substantially undermined it by the early 1980s. The Graham-Leach-Blilely Act was helpful in hastening the arrival of the current depression, but not necessary.
Financial innovators had already figured out ways to avoid things like reserve requirements (e.g., through repurchase agrements, swap agreements, and, later, derivatives) and naked shorting (e.g., through derivatives again). With innovations like high frequency trading and dark pools, they were able to avoid the prohibition of pooling arrangements that prevented price discovery.
A major enabler of the financial innovators (i.e., the cheaters) was the Chicago School of Economics, which, for whatever reason, applied some of its best minds to establishing that the stock market shark tank was once again safe for the recreational swimmers. When I read Justin Fox's The Myth of the Rational Market, I was shocked that economists would concern themselves with speculation in the secondary markets, but there they were doing exactly that!
One of the things that Chicago School economists (and their neoliberal brethren of Austrian stripe) accomplished is the financialization of the real economy. With the concerted return of monopoly capitalism beginning in the Reagan era, the marked increase in IPOs in the 1990s, and the consolidation of investment banks and commercial banks in the oughts, more of the American economy than ever before was subject to economic decision making driven by "maximizing shareholder value."
But what does that really mean, "maximizing shareholder value?" With all of the "rules" of valuation in the secondary equity market established through things like the Capital Asset Pricing Model, the "M&M" equations, and discounted cash flow analysis, maximizing shareholder value means maintaining, on a quarterly basis, the illusion of perpetual profit growth beyond the pace of inflation and at or above current consensus expectations.
In short, the management of publicly traded companies must run their companies to simulate a financial instrument that exhibits perpetual growth that meets or exceeds expectations.
There are only four things that management can do to exhibit the expected growth. First, it can grow the business organically by increasing sales in existing markets or branching out to new markets. Second, it can acquire other companies. Third, it can engage in cost arbitrage (e.g., wage arbitrage, accounting arbitrage, or tax arbitrage). Finally, it can "cheat," a term that I use broadly to refer to things as relatively inconsequential as timing orders to hit in a desired quarter or as malignant as Enron or S&L-level control fraud.
Governments are subject to similar pressures through the secondary bond market and are similarly limited in what they can do to meet the expectations of "the market" and maintain the viability of its economy (and currency).
For all intents and purposes, these objective "rules" for the valuation of stocks and bonds on the secondary market accomplish exactly what the alleged "money trust" did, which is control of American industry and, therefore, the American economy. The net result is that we are all at the mercy of financial speculators who demand the impossible: perpetual growth in a world of finite resources.
Damon Vrabel had a great post today about the implications of how the current monetary system run by the rules of financial speculators has pushed debt levels to the saturation point. A version of Damon's post appears at Max Keiser, but be sure to check out the much meatier original.
