step one…

Posted on Sunday 8 March 2009

[If you too become obsessed with Deregulation, selise has the definitive timeline]

Which Idiot Decided to Repeal Glass-Steagall?
Oxdown Gazette [FDL]
By: selise
February 22, 2009

From Stiglitz’s 2003 book, The Roaring Nineties:
    For more than half a century, commercial banking, which takes deposits from households and firm and makes conventional loans, had been separated from investment banking, which helps firms issue new bonds and shares. The same company could not lend money and also sell securities, in other words. The Glass-Steagall Act, which barred this, was one of the reforms put in place by the administration of Franklin Roosevelt, in response to the wave of bank failures that had followed the Great Crash of 1929. But the ideas behind Glass-Steagall went back even further, to Teddy Roosevelt and his efforts to break up the big trusts, the large firms that wielded such economic power. TR and the Progressives of the early twentieth century were alarmed not only about the concentration of economic power but about its impact on the political process. When enterprises become too big, and interconnections too tight, there is a risk that the quality of economic decisions deteriorates, and the "too big to fail" problem rears its ugly head. Expecting to be bailed out of trouble, managers become emboldened to take risks that they might otherwise shun. In the Great Depression, when many banks were on the ropes, it was, in effect, the public that bore the risk, while the bank got the reward. When banks failed, the taxpayers paid the price through publicly funded bailouts.

    The Glass-Steagall Act of 1933 addressed a very real problem. Investment banks push stocks, and if a company whose stock they have pushed needs cash, it becomes very tempting to make the loan. The U.S. system worked in part because under Glass-Steagall the banks provided a source of independent judgments on the creditworthiness of businesses. When a "full-service" bank makes most of its money by selling equities and bonds or arranging "deals," issuing loans becomes almost ancillary—a sideline…

    With Glass-Steagall, the United States rejected the course followed by other nations, such as Japan and Germany, that did not separate commercial and investment banking—I believe to our evident benefit. But American banks themselves saw Glass-Steagall as reducing their opportunities for making profits and not surprisingly began to insist that the rules separating commercial and investment banking had become passé. In an age of free-floating capital and giant multi-national companies, they argued, banks had to be integrated, to make advantage of what are called "economies of scope"—the benefits that businesses can reap by working in many different areas at once. Global competition was too intense for bank concentration to be a serious worry [though in fact, many borrowers, especially small and medium-siaze firms, have access only to a few potential lenders], and Glass-Steagall supposedly put American banks at a disadvantage.

    In the mid-nineties, the banks mounted a concerted campaign to have Glass-Steagall repealed. The conditions were favorable. Prosperity made the notion of bank failure seem very remote [though the S&L crisis of the eighties ought to have been a caution]…
Within three months of F.D.R.’s inauguration, Congress passed the Glass-Stegall Act [which became known as The Banking Act of 1933]. This reform legislation had two parts:
  • The Federal Deposit Insurance Corporation [FDIC]: In order to put a stop to the destructive runs on Banks, the Federal Government got into the Insurance business, insuring Savings Accounts in case of Bank failure.
  • The Separation and Regulation of Commercial and Investment Banks: This is the part known as regulation. Hearings disclosed obvious conflicts of interest when Banks invest money from their vast holdings in Savings Accounts. So, the Bill imposed strong restrictions on investing by these banks [Commercial Banks]. Likewise, the behavior of Banks that were involved in investing were also heavily regulated. It also limited Bank Mergers. The design here was clear, In the boom before the Crash, Banks had loaned money to people to put in the Market and had invested their assets as well. Glass-Stegall imposed restrictions to stop speculators from using other people’s money. Bank size [merger] was also regulated
 
As I’ve read and reread the story of the New Deal and the erosion of its Regulations over the ensuing 75 years, I marvel at the brilliance of the Glass-Stegall Act of 1933. By separating Commercial and Investment Banks, they essentially put up a barrier to the temptation to speculate with other people’s money without their consent and blocked all kinds of obvious conflicts of interest. The Act added safety at the expense of flexability, and the financial industry mounted an immediate assault on this legislation that took sixty six years to succeed in destroying it. Enormous amounts of money were spent lobbying against the Bill, and it’s demise involved Democrats and Republicans alike. The final blow was the Gramm-Leach-Bliley Bill that finally repealed it.


the idiots deciding…

It only took 10 years for a global financial collapse mirroring the 1929 version that got Glass-Stegall passed in the first place [Senator Phil Gramm also helped things along with his Commodities Futures Modernization Act a year later].

A Senator from rural Virginia and a Congressman from rural Alabama put together a winning combination in response to the 1929 Stock Market Crash that became an essential ingredient in making Capitalism work. Allowing Banks to manage our individual resources while also being players on volatile markets just doesn’t work. It creates a toxic environment that fans the fires of greed and fraud. Glass-Steagall put a damper of the highs and lows and allowed individuals to choose between safety and risk-taking. When that damper went away, the clock started ticking – and it ran out pretty fast. We now have giant financial institutions that are Banks/Investors/Hedge Funds that are "too big to let fail" – again! Reinstituting a Glass-Steagall-esque safety net seems to me to be step one in our recovery…
  1.  
    March 8, 2009 | 1:51 PM
     

    Here’s the big question: Will we learn from this?

    I want something other than journalism’s new model of just reporting both sides of an argument. I want some kind of authoritative voice — somewhere — to show the public the truth of what you have just written, and make it stick.

    The Republican’s will fight re-regulation and water it down as much as they can. They shouldn’t be allowed to fool the public about this. Obama is probably as good as we’ve ever had in using the bully pulpit to educate us. But the journalists and pundits have to do their job too.

  2.  
    March 8, 2009 | 1:51 PM
     

    And the internet and blogs such as this.

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