America's No. 1 financial conglomerate

Chapter 633 What They Fear

"A cage?" Annie's tone was clearly uncertain. She frowned slightly, not quite understanding what the other person meant.

In her view, the degree of freedom enjoyed by American capital has reached its peak. Whether it is market access, business decision-making or profit distribution, there are few strong constraints. How could she use a word like "cage" that implies confinement to describe it?

If American capital is considered a cage, then what about the capital of other countries?

Are they puppets on strings in someone else's hands?

Having nothing better to do, Ernst decided to teach her a lesson.

Do you know what interests the elephant represents?

Anne nodded. "Industrial capital represents the capital power in the real economy sectors such as manufacturing, energy, and agriculture."

"And what about the donkey?" Ernst asked again.

"Financial capital." This is common sense in the American political system.

Ernst nodded; he wasn't surprised that the other party knew this.

"But did you know that financial capital is an industry that is heavily constrained by industrial capital?"

Anne frowned even more. Although financial capital and industrial capital have conflicting interests, they are more often interdependent and develop in a collaborative manner. And how does industrial capital impose shackles on financial capital?

Seeing Anne's worried expression, Ernst continued, "The Glass-Steagall Act of 1933 drew back the iron curtain on the separation of the financial industry, with commercial banks, investment banks, and insurance companies operating independently."

"In short, commercial banks can only engage in traditional banking businesses such as accepting deposits and issuing loans, and are not allowed to get involved in investment banking businesses such as securities underwriting and stock trading; investment banks are not allowed to conduct savings deposit business, and can only focus on financial intermediary services such as securities issuance and merger and acquisition advisory; insurance companies must also adhere to their core insurance business and are not allowed to participate in banking or securities businesses across sectors."

"Subsequent Securities Law and Securities Exchange Law further prevented investment banks from underwriting junk bonds and shell company stocks. When issuing bonds, they must also conduct due diligence on the issuer's financial situation."

"Not to mention, exaggerating returns and concealing liabilities, as well as other deceptive practices, are strictly prohibited."

"If the Glass-Steagall Act is a form of physical segregation, then these two acts are powerful tools for information transparency and a mirror reflecting the true nature of the financial industry, curbing the possibility of disorderly expansion of financial capital into high-risk areas from the source."

"But isn't this a good thing?" Annie couldn't help but interject.

"If it weren't for the disorderly expansion of financial capital and rampant speculation at the time, commercial banks and investment banks would have been operating in tandem, absorbing large amounts of depositors' money and then investing the funds in the stock market for frenzied speculation; securities firms and listed companies would have colluded to make huge profits through insider trading and stock price manipulation; and trust companies would have used high leverage to speculate, inflating the financial market bubble to ever greater heights."

"Even a stock market crash wouldn't have triggered such a large chain reaction that it paralyzed the entire US economy and led to the Great Depression."

"This is a rebalancing of power between industrial capital and financial capital, allowing financial capital to return to its essence of serving the real economy, rather than being above the real economy."

"Therefore, the US manufacturing industry has ushered in a golden age of development, with industries such as steel, automobiles, and electronics leading the world, and the unemployment rate remaining below 5% for a long time. This is closely related to the constraints on financial capital and the priority flow of funds to the real economy, which is the best proof of the implementation of those restrictive laws."

Ernst nodded, acknowledging that what she said was true: "I've learned a lot from the textbooks."

Annie gave a soft snort, feeling that he was being sarcastic.

Ernst was satirizing the idea that "capital doesn't think that way."

"The essence of capital is profit-seeking, and the pursuit of short-term, high-efficiency profits. For financial capital, when the returns from speculation far exceed those from investment in the real economy, the so-called constraints and regulations become, in their eyes, a cage that hinders the maximization of profits."

"You can imagine this," Ernst's tone turned somber. "If we could go back to the Gilded Age before the Great Depression, when capital was growing unchecked, financial capital wouldn't be bound by rules like business separation, information disclosure, and risk management. They could quickly amass enormous wealth in the financial markets through diversified operations, insider trading, and market manipulation. Why would they bother investing in the real economy, where returns are long-term and highly uncertain?"

"Commercial banks can simultaneously absorb depositors' funds while underwriting junk bonds and speculating on their own or related companies' stocks through their securities departments, thus inducing people's savings to continuously flow into the stock market bubble."

"Investment banks can collude with listed companies to fabricate false financial data, exaggerate investment returns, and lure ordinary investors to buy at high prices."

"Trust and insurance companies can leverage their small amounts of capital dozens of times to speculate and earn excess profits through multiple layers of leverage."

Even if stock prices eventually plummet and the market crashes, leaving tens of thousands of depositors with nothing and ordinary investors bankrupt due to the stock market crash, these financial capital entities have already cashed out and left the market, pocketing huge profits.

"For them, the only loss is their reputation, but the gain is real wealth."

"This is the real home ground that financial capital longs for, a speculative paradise without rules and where anything can be done."

"If stock prices are manipulated through methods such as market manipulation and insider trading, forcing industrial capital into a speculative frenzy, and the stocks of manufacturing giants are maliciously hyped by securities firms, with price-to-earnings ratios far exceeding reasonable levels, the profits of the real economy will eventually be swallowed up by financial speculation, and everyone will be working for capital, including industrial capital."

"But that's impossible. Neither the government nor the people can allow the financial market to return to that era of no constraints," Anne retorted.

Ernst laughed, and after laughing, asked, "Do you know why actors get to sit inside that white house?"

"Because he was a spokesperson for the common people, and he represented the outcome that the people needed at the time."

"Ha," Ernst scoffed at the other man's naiveté, "Without the support of capital, he can't even get past the primaries, let alone the final general election."

"The real reason is that he was willing to work for financial capital, become its spokesperson, and promised to implement a series of policies that would loosen the reins on financial capital, promoting his so-called new ideas and Reaganomics."

Ernst looked at her, with a hint of guidance in his voice, "What is his core argument?"

Anne immediately thought of "reducing government intervention, promoting market-oriented reforms, and relaxing industry regulations."

She froze for a moment after saying that.

She thought of the series of major reforms he had implemented during his term, each step seemingly aimed at loosening the reins on financial capital.

In 1980, shortly after taking office, he got Congress to pass the Depository Institutions Deregulation and Currency Control Act.

This bill completely breaks down the previous business barriers between different financial institutions, allowing deposit-taking institutions such as savings and loan associations to conduct a wider range of businesses, such as issuing commercial loans and processing credit card business, which were previously the exclusive domain of commercial banks.

This means that savings and loan associations can directly compete with commercial banks, and financial institutions have a significantly greater autonomy in their operations.

And this is just the beginning of loosening restrictions.

In 1982, the Garn-St. Germain Depository Institutions Act further accelerated the deregulation, allowing banks to establish money market deposit accounts, enabling them to compete directly with money market funds.

Later, it allowed the issuance of commercial real estate loans, consumer loans, and even investments in junk bonds, breaking the restriction that savings loans could only focus on mortgage loans.

Furthermore, the Securities and Exchange Commission has relaxed regulations on brokerage commissions, allowing brokerages to set their own prices, while also simplifying the approval process for companies to go public and raise funds, thus reducing financing costs.

It also broke with the tradition of banks establishing branches across state lines, allowing bank holding companies to acquire distressed banks across state lines.

The regulation of financial futures, options and other derivatives has been basically semi-open. Since the 80s, the trading volume of the derivatives market has almost doubled every year.

She thought of the two bills that Donald recently championed: the Financial Services Modernization Act and the Commodity Futures Modernization Act.

"Not bad, she has some talent, not too stupid." Ernst reached out and patted her head, praising her.

Anne slapped away his large hand that was stroking her, looking annoyed, but her slightly flushed cheeks betrayed her, which Ernst found somewhat amusing.

"The Financial Services Modernization Act effectively repeals the core provisions of the Glass-Steagall Act, fully allowing mixed operations."

"The Commodity Futures Modernization Act exempts derivatives from regulation, which means that financial capital has taken a detour and indirectly breaks the requirement of the Securities Law that listed companies must disclose true financial information and prohibit false advertising."

"For example, financial institutions can package underlying assets such as stocks and bonds into complex derivatives, change the form of trading, and continue to engage in speculative operations without having to comply with obligations such as information disclosure and risk warnings."

Ernst leaned back slightly, his tone expectant, and said slowly, "In the stock market, I follow the rules."

"But I don't play the stock market anymore. Instead, I design these stocks into derivatives, which are called something else, but they are operations similar to the Gilded Age."

"Once these two bills are passed, financial capital will once again enter a phase of unbridled growth, and will once again dominate industrial capital."

"If a huge scandal were to break out at this time, involving various high-ranking officials within the company, what do you think the public would think? What would the industry and capital think?"

"So those other financial powers that were originally on the sidelines can no longer allow the restoration of the kingdom to continue to be opposed to you, because it involves their huge interests." This time, Annie finally understood everything.

"They not only have to manage it, but they also have to help you manage it."

"Because of Ernst Asset Management, you are also one of the beneficiaries of financial capital."

"But if it comes to a lose-lose situation, you have industrial capital to back you up, but you don't have financial capital."

There was actually another reason, but Ernst didn't elaborate, because what Anne said was the most fundamental reason.