Bring Back Glass-Steagall

Elizabeth Warren“The repeal of Glass-Steagall did not cause the financial crisis.” This is a common claim made by conservatives in defense of doing absolutely nothing to fix our financial industry. And like much conservative wisdom, it is true enough to be dangerous. Glass-Steagall was the depression era law that stipulated two kinds of banks: commercial and investment. And never the twain shall meet. This had to do with FDIC, which insures deposits. The idea was that if the government was going to guarantee deposits, the banks were going to be careful with those deposits. Similarly, it was assumed that those investing with commercial banks were sophisticated investors who understood the risks. But in 1999, Glass-Steagall was repealed.

What makes this important is not that this repeal itself caused the financial crisis, because it most certainly did not. But the repeal allowed banks to get bigger. And since the crisis, those banks have only gotten bigger still. So the repeal of Glass-Steagall did exactly what those who first passed the law would have predicted. So we went from banks that were too big to fail to banks that are even bigger than too big to fail.

In a sane world, after 2008, all of these banking behemoths would have been broken up into little bite size chunks. But that brilliant man who many think “deserves” to be the next Federal Reserve chairman thought that was a bad idea. And we all know what buds Summers and the president are, so Summers ruled the day and the financial crisis led to us having an even more risky industry than we started with! Brilliant. Put that man in charge of the Fed!

Now, however, a bipartisan group of senators (bipartisan in the sense of Elizabeth Warren with two Democrats and McCain) have proposed reinstating Glass-Steagall. The banking industry, predictably, is against it. “It will make us less competitive!” The shocking thing is that such complaints are not openly mocked. No other industry would be allowed to make such claims. Dean Baker puts it well:

What is striking about the argument on re-instating Glass-Steagall is that there really is no downside. The banks argue that it will be inconvenient to separate their divisions, but companies sell off divisions all the time….

Stronger regulations might lead us to do more business with foreign-owned banks since weaker regulations could give them some competitive edge. That should bother us as much as it does that we buy clothes and toys from Bangladesh and China.

But because bankers are so powerful and as Baker puts it “own Washington” their competitiveness is our problem, just like it is our problem when they fail.

The best thing about reimplementing Glass-Steagall is that it would effectively do what our president was too weak kneed (and beholden) to do: break up the big banks. There is no doubt that this would not be enough, but it would be a start. And the fact that people are even talking about is a very good sign.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

0 thoughts on “Bring Back Glass-Steagall

  1. I think the only sense in which repealing Glass-Steagall didn’t cause the financial crisis is that it was already being more-or-less ignored by the Reagan and Clinton administrations. So the Financial Services Modernization Act was basically putting a ring on the finger of the obviously pregnant bride. It’s like antitrust law, which theoretically is still in effect, but very rarely gets enforced these days.

    You’re right, though; even talking about reinstating G-S is a good sign. It means more people are paying attention to this stuff, and the more that happens, the more they’ll call for sensible regulation. Part of what deranges the "free market"-worship by right-wingers is a sense that, since whatever powerful people do is a function of the holy market, we don’t need to care about what they do. Nonsense, of course . . .

  2. @JMF – Whenever I talk about the 2008 crisis, I have a hard time deciding how deep to go. On the most basic level, it was all about the housing bubble. But as you dig deeper, you see that a big part of the housing bubble came from the fact that banks were pushing easy mortgages. Deeper still you get to the new financial instruments.

    You are right that G-S really was pretty much ignored at that point. But even with it, there would have been a problem. Here we get to the fact that the ratings agencies have tremendous power but no accountability. When they gave these junk bonds AA and even AAA ratings, then they became perfectly acceptable investments for commercial banks. So in that regard, G-S really had nothing to do with it.

    But it all comes down to the fact that the whole system is rotten to the core. We will continue to have big problems as long as any of these weak links remain. And there is another aspect of bringing back G-S: symbolism. By having it, we as a culture make a statement about what matters to us. That’s important I think.

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