Why Not Return to Glass-Steagall?
Why Not Return to Glass-Steagall?
Paul Volcker and the Volcker Alliance, a think tank headed by the former Federal Reserve Bank chairman to restore trust and effectiveness in government (www.volckeralliance.org, 2015), recently released a research report titled “Reshaping the Financial Regulatory System” that creates a framework for more regulatory reform of the financial watchdogs. It might work, it might not. But it begs the question, why not scrap all of the attempts to rebuild the protections afforded by the Glass-Steagall Act and just reinstate that law without all of the convoluted machinations of Congress? Financial downfalls can happen without the help of banks. There was the very deep depression of 1920-21 that was more the result of the end of the First World War. Raging inflation was as much to blame for the Carter Era Malaise as much as government policy and not as much banking mischief. However one of the results of that time was the eventual Savings and Loan debacle due to deregulation allowing the S and L’s to try and keep pace with everyone else. When this deregulation happened greed and unsound lending practices in building and land took over (www.fdic.gov, 2000). Has anyone seen a Savings and Loan lately, besides the Bailey Building and Loan?
The Banking Act, AKA Glass-Steagall was a result of banks playing both sides of the very hot stock market of the 1920’s that ushered in the Great Depression. Not only did the banks spin the stock market wheel, they did it with funds provided by the depositors. In addition to investing with depositors’ funds, banks began to sell stocks of holding companies that were dubious at best and pyramid schemes at worst (Rickards, 2012). Thus, when the stock market crashed in 1929 depositors were on the hook for the banks’ losses. The beginnings of the Great Depression from 1929 to 1933 saw a number of bank runs and failures. Representatives Glass and Steagall managed to pass a law that grouped banks into two groups: investment banks that can gamble, nay, invest, on Wall Street and savings banks that take deposits and make loans and can invest only in government bonds (Sekar).
In the halcyon days following the Regan tax cuts the economy took off similar to the roaring twenties in a fashion. Savings banks were at a loss because depositors were taking money out of banks and putting it into other more lucrative investments. It seems the Glass-Steagall Act and its separation of investment and savings banks prevented savings banks from jumping on this economic boom. The majority of bank failures from the late 1980’s to 1993 were due to unsound lending practices in the very hot commercial real estate markets (www.fdic.gov, 2000). Commercial real estate was something that these banks did not understand which triggered the laws of greed and stupidity.
Three times, at the urging of banking concerns (Rickards, 2012); bills were sent to President Clinton’s desk to repeal Glass-Steagall. Finally, on the third try, the Gramm-Leach-Bliley Act effectively removed this firewall in 1999. Former President Clinton signed the GLBA along with repealing regulations of derivatives (Morris, 2015). Then the real estate boom, that brought default credit swaps, sub-prime mortgages and a host of other questionable investment vehicles back to the common small investor through savings banks, slowly started. Greed and unsound lending practices for mortgages took over. While not solely responsible for this kid in the candy store behavior, banks played their part. The exciting ride came to an abrupt end in 2008 with crashing markets, Lehman Brothers Bank going under and a host of other “Too Big to Fail” bailouts. As alcohol will cloud a drunk’s common sense, greed can and will do the same to the person who is putting away something for a rainy day.
Let us go back to the Volcker Alliance. This think tank calls for the merger of the Securities and Exchange Commission (SEC) with the Commodities Futures Trading Commission (CFTC). Then it would take the resulting group and put them under the Federal Reserve Board’s authority independent of Congress’ constant underfunding. The thinking here is to build upon the Dodd-Frank Act which is another result of trying to bring back Glass-Steagall but not quite Glass-Steagall. Dodd-Frank was a reaction and a result of the 2008 “Great Recession”. As it is, these commissions are overworked and underfunded. Merging them does not bode well. One result may be a confused mission; a second would be added responsibilities to an already overworked group. Current SEC head, Mary Jo White recently went in front of the budget mongers in Congress to request operating funds. She reminded the representatives that a large part of the SEC’s mission is looking out for the investors, the people whose retirement and other funds are invested, the people who should be able to trust their brokers, the people who are not skilled in the ways of Wall Street. These are the same people the Glass-Steagall Act protected for several decades. Mr. Volcker and his alliance want to put the body that protects the people from questionable practices of investment firms and bankers under the watchful eye of the chief bankers of the country. A more reasoned approach may be the repealing of the litany of half measures and return to what actually worked for several decades.
Economies are cyclical; despite the FED’s best efforts there will always be rises and declines and the best that the FED can do is minimize the bad effects when they occur. The Federal Reserve Bank has a dual mandate of keeping inflation under control and keeping unemployment to a minimum.
Taking the legal enforcement duties from the executive branch and giving legal enforcement of laws to a body independent of the government opens the door to the tyranny of the bureaucrat. As in vogue as disliking the police and other law enforcement agencies currently is, giving what could become inquisition like powers to an agency outside of the government cannot be a good idea. The FED’s full time job is enumerated above. Law enforcement, inspection of financial firms of all types and making laws should be left up to the executive branch of the government which answers to the people who elect it. Ms. Yellen and her crew have their work cut out for them; let’s not complicate things by giving them more to do.
(2015). Retrieved June 1, 2015, from www.volckeralliance.org: https://volckeralliance.org/mission
Morris, D. (2015, May 27). Big Money Backfires In Politics – Dick Morris TV: Lunch Alert! Retrieved May 27, 2015, from DickMorris.com: http://www.dickmorris.com/category/lunchtime-videos/
Rickards, J. (2012, Aug 27). Repeal of Glass-Steagall Caused the Financial Crisis. Retrieved April 22, 2015, from www.usnews.com: http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of...
Sekar, A. (n.d.). The Glass-Steagall Act Explained. Retrieved May 4, 2015, from www.nerdwallet.com: http:/www.nerdwallet.com/blog/banking/glass-steagall-act-explained
www.fdic.gov. (2000, June 5). Retrieved May 4, 2015, from https://www.fdic.gov/bank/historical/history/vol1.html
