Should We Reinstate Glass-Steagall? 14 comments
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The one unmentionable topic that has become the non-barking canine is reinstating the Glass-Steagall Act after we repeal the Gramm-Leach-Bliley Act. Since no one else will say it aloud, I will. Let us re-erect supposedly harsh regulatory lines separating activities between commercial banks and investment banks. Once more, commercial banks may only underwrite government-issued bonds (which should keep them busy for years), thus avoiding the temptation of deposits. The remainder of underwriting securities goes to investment banks.
Before everyone reaches for his or her keyboard, telling me why repealing the Gramm-Leach-Bliley Act, which negated Glass-Steagall, is impractical and is a business-growing impediment, in the 21st century, that is precisely the dash of regulatory perspective we seriously need now.
Financial institutions will forever devote a significant portion of their energy and their cash to figure out ways around regulatory restrictions. It is not the job of domestic authorities to placate the whims and desires of global institutions playing international markets, using docile laws, for fun and profits. The values of international capitalism do not run congruent with the values of domestic capitalism. In addition, domestic capitalism has a lousy track record against international capitalism.
The Obama Administration has giving broad powers to the Federal Reserve to oversee banking, and amorphous money institutions, including increased capital ratios. New ratios, however, are below some international standards. Another byproduct of the reshuffling of regulatory priorities will mix for the first time the oversight of commerce and banking. Nevertheless, the absence of strict divisions between banking business lines is unchanged.
Under the Glass-Steagall Act, when enacted in 1933, regulators protected bank depositors from stock market speculation and other investment banking activities. Over time, we also generated enough wealth to end the Great Depression, create the largest middle-class any nation has experienced in history. We were able profitably expanded the aviation, automobile, and pharmaceutical industries.
Nor did American capitalism neglect the opportunities to make money in entertainment, travel, aerospace, electronics, or telecommunications. The existence of Glass-Steagall did not block private industry from entering, and making individuals rich, from the computer and personal computer areas. Trade and manufacturing benefited greatly through the years with G-S on the books.
Last but not least, the financial industry. As Charlie Sheen’s character, Bud Fox demanded an answer to his question from Michael Douglas’s Oscar-winning portrayal of Gordon Gekko in Oliver Stone’s 1987 Wall Street, “How much is enough?" People in the financial services industry made more money than most other Americans did throughout their careers. Wall Street did ok under Glass-Steagall. What good does it do to kill the golden goose as it increase production of delivering the golden eggs?
We will not go backwards even if it is in our best interest. We culturally frown upon looking backwards. Sometimes it is a virtue while other times it is risky.
Do we like managing risk or do we attempt to manage the risk we like?
Disclosure: No positions
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This article has 14 comments:
One consequence of Glass-Steagall was to make the merger between Citibank and Travelers Insurance illegal. To save Citibank officials from suffering the consequences of breaking the law – and in the process, to open the doors to the conglomerate movement that brought down the economy – President Clinton took the advise of Messrs. Summers, Greenspan and their fellow free enterprise ideologues and signed into law the repeal of Glass-Steagall in 1999. Banks were permitted to buy insurance companies real estate and stock brokers and law firms to package junk mortgages into junked collateralized debt obligations (CDOs), insure them with junk-insurance policies written by A.I.G. and other companies taking fees for promising to pay money they did not have (they paid it out to themselves in exorbitant salaries and bonuses), and get bailed out with trillions of dollars of “taxpayer” money in the form of the Federal Reserve and Treasury’s “cash for trash” swaps.
Mr. Obama earlier made a point of bringing in Paul Volcker as an economic advisor for his reforms, and indeed the former Fed Chairman (Mr. Greenspan’s predecessor) gave some good advice: reverse the repeal of Glass-Steagall. Given Mr. Summers’ current position as advisor to Mr. Obama, people asked who would win: the reasonable Mr. Volcker, or Mr. Summers, who had urged repeal of the act in the first place? It proved to be no contest. There is no thought of breaking up the seemingly obvious conflict of interest between commercial banking and investment bank “casino capitalist” functions.
As a second opinion, the repeal of Glass-Steagall is why we are where we are in the first place.
On Jun 22 09:40 AM conceptwizard wrote:
> The capstone of FDR’s New Deal was the Glass-Steagall Act separating
> commercial banking from investment banking. This blocked the financial
> conflict of interest between serving retail bank customers and investment-bank
> profiteering.
>
> One consequence of Glass-Steagall was to make the merger between
> Citibank and Travelers Insurance illegal. To save Citibank officials
> from suffering the consequences of breaking the law – and in the
> process, to open the doors to the conglomerate movement that brought
> down the economy – President Clinton took the advise of Messrs. Summers,
> Greenspan and their fellow free enterprise ideologues and signed
> into law the repeal of Glass-Steagall in 1999. Banks were permitted
> to buy insurance companies real estate and stock brokers and law
> firms to package junk mortgages into junked collateralized debt obligations
> (CDOs), insure them with junk-insurance policies written by A.I.G.
> and other companies taking fees for promising to pay money they did
> not have (they paid it out to themselves in exorbitant salaries and
> bonuses), and get bailed out with trillions of dollars of “taxpayer”
> money in the form of the Federal Reserve and Treasury’s “cash for
> trash” swaps.
>
> Mr. Obama earlier made a point of bringing in Paul Volcker as an
> economic advisor for his reforms, and indeed the former Fed Chairman
> (Mr. Greenspan’s predecessor) gave some good advice: reverse the
> repeal of Glass-Steagall. Given Mr. Summers’ current position as
> advisor to Mr. Obama, people asked who would win: the reasonable
> Mr. Volcker, or Mr. Summers, who had urged repeal of the act in the
> first place? It proved to be no contest. There is no thought of breaking
> up the seemingly obvious conflict of interest between commercial
> banking and investment bank “casino capitalist” functions.
>
> As a second opinion, the repeal of Glass-Steagall is why we are where
> we are in the first place.
Reinstatement would force current operations to shut down, restructuring of companies would include permanently hacking off parts of their business that were the most profitable for them over the past few decades. Destroying previously blockbuster profit machines that raked in the cash for years is not a pill many in the industries want to swallow.
Unfortunately without that bitter pill and other sane measures, such as focusing on why small businesses that traditionally help spur growth in our country are being slaughtered right now, while the largest institutions that were key players in the mayhem were paid off, bought out, and still exist, we will see more pain. America is on fire with a fever. Until that fever breaks the temperature will rise to burn off the disease.
Somehow I think not. To resurrect Glass-Steagall would require a major shift in Obama's present train of thought, as to his administration's approach on the economy. It would require him to 'step' on more than a few political toes and put his re-election in question. I don't think he will take that risk.
Funny thing, if he did, he would turn out to be the 'Great Savior' that most thought they had elected, instead of the 'business as usual' type that he has turned out to be. What a shame.
YES!
Will it happen?
Probably not.
Also, if we just repealed this law couldn't we avoid/reduce the next 6 month debate on financial system regulation, and also avoid the cost/burden of the regulation over the next years/decades? Commercial banks would be regulated. Investment banks could be "unregulated" and take the risks/rewards that make capitalism the engine of growth for the world.
Aside from the pain created by "reversing" course, the only argument for continuing on the current path is that "other countries" banks "bundle" commercial and investment banks so US banks would be at a competitive disadvantage. I'm not sure if I believe that, but it does seem it would be better if somehow a global entity (G20, WTO, etc) could sponsor this type of change.
I'm not optimistic if any of this could happen, but it sounds good to me!
What fun is it if they actually have to facilitate business rather than buy it all up, package it up and sell it as bundles of garbage wrapped up in nice deribvative guarantees from a insurer who has almost no capital to speak of to unsuspecting customers.
Without Glass Stegal banks have created a great system. The methodoligy goes as follows: Own the money supply (to make loans with other people's money), own the brokerages (to buy the loans), own the insurers (to insure the loans), and payoff the ratings agancies (to make sure nothing goes wrong with the loans backed by companies with insufficient capital to back the loans with insufficient reserves written by banks which collected insufficient paperwork from customers with insufficient income). What could ever go wrong? After all the Fed is owned by the banks and the Treasury is always an appointed banker. And the regulators seem only interested in fighting fires (that is asking for government money to clean up the trash constantly falling onto the market).
Yes, Glas Stegall is looking more and more like the only honest solution available. After all, look how effective financials have gamed the Bush Jr. and Obama administration.
On Jun 23 03:11 PM Phil Trupp wrote:
> Legislative (read governing) Washington has over the years morphed
> into Corporate Washington. In the real world it makes sense to bring
> back Glass-Steagall. It makes sense to restore the uptick rule. It
> makes sense to unwind the concept of too big too fail. But odds are
> that none of these reasonable, mainstream events will occur. Virtually
> every top financial regulator (Bernanke is the exception) is a linear
> creature of Wall Street. Almost without exception these bankers-turned-bureauc...
> will talk sound economics. They will pose as mainstream thinkers.
> But inevitably they will revert to type. Will the coup be complete
> when Timothy Geinther is appointed to replace Bernanke?
On Jun 23 02:11 PM BerkeleyBob wrote:
> Interesting article and comments. Yes to reinstatement of Glass Steagall.
> The current reforms appear more cosmetic than structural. I am dubious
> about giving the Fed more regulatory authority. If the present administration
> is serious about correcting regulatory fecklessness, why not hand
> the chairman of the SEC his walking papers for a start? The problem
> may not be the legislation and regulation on the books at present,
> but in getting rid of those who for ideological reasons, decline
> to enforce...