An Analysis of Investment Banking

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Thomas Jefferson

In a free market with only 100% reserves of sound currency banks would be lending their own reserves of capital and setting interest rates based on a true assessment of the risk presented by each borrower.

In contrast, the Fed (which is private) lends out fiat currency and then licenses commercial banks to create more money by loaning out at their artifically low rates. This makes inflation, and easy money and destroys the incentive for banks to freely set interest rates based on actual risk because they just created the money (and therefore don't have the risk that a lender would who was using their own accumulated savings) and are tied into the artificially low Fed-established interest rates.

Investment banking firms and investment banking in general have been in the news quite a bit over the past six months or so. How did these investment banks wind up in so much trouble? Home prices increased because the securitization market rapidly increased the amount of capital (which was done through fractional reserve banking) available to the mortgage market and you had mortgage brokers making loans, selling them to investment banks who then sold them to investors. This triggered a speculative boom that led to a consequent demoralizing of business confidence first in housing, then the stock market and has now worked its way into the general economy.

Where did investment banking come from? Basically it was the cumulation of a long war between the Rockefeller and Morgan factions in the early 20th century and resulted in the Glass-Stegall Act.

For more, check out "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers."