Why we're still talking about Glass-Steagall

[yallerdawg]

Source: Marketplace, by Tracey Samuelson

Republicans have called for the reinstatement of the Glass-Steagall Act in their party platform approved Monday, a last minute addition that's somewhat surprising, given the GOP is more typically associated with deregulation and the Depression-era banking regulation has been a significant part of Bernie Sanders’ campaign. It’s also in a draft of the Democratic party platform, which will be approved next week.

Glass-Steagall, part of the Bank Act of 1933, was drafted as a response to the stock market crash of 1929.

“It’s a return through rose-colored lenses to a simpler, happier time,” said Donald Lamson, counsel at the law firm Squire Patton Boggs. “It makes good politics. No politician ever lost votes running against a bank. Who loves their bank, really?”

But Lamson argued having different businesses and diverse revenue streams can actually be a good thing for the financial health of banks.

And it wouldn't have prevented the recent financial crisis, said Aaron Klein, a fellow at the Brookings Institution.

“Glass-Steagall is a simple rallying cry about a set of ideas and values,” he said. “When you actually look at the prescriptive policies contained in Glass-Steagall, they don’t really make sense in a modern era.”

http://www.marketplace.org/2016/07/19/economy/why-were-still-talking-about-glass-steagall

[awake]

1. Bull deregulating the Banks is not the solution

Glass-Steagall Act Is not the end all and be all but it is part of reregulation of the financial system that needs to occur. In Canada Banks were not allowed to act like those in the states were and in 2008 they were left in better shape than most of the banks in the world.

[think]

2. Lamson is a lawyer who lobbies for the banks. Hillary's economic adviser Joseph Stiglitz gives this

in regards to Glass Steagall and the crash:

CAPITALIST FOOLS

BY JOSEPH E. STIGLITZ - JANUARY 2009

~Snip~

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking....

Read more:
http://www.vanityfair.com/news/2009/01/stiglitz200901-2

[Johnny2X2X]

3. Here's the truth as I see it

Did the behavior prohibited by GS cause the 2008 economic collapse? No. In fact there is little evidence it contributed to it much at all.

But is it a good idea for banks to be doing this? No! It seems like a very bad idea for banks to mix their high risk and low risk functions. It may not have caused 2008, but it could cause the next crisis, and it could hurt consumers even if it doesn't cause a big crisis.

[yallerdawg]

4. 1933 legislation is not the solution.

Glass-Steagall worked for its time, but now we need a 21st century solution. That’s why Hillary Clinton has proposed a comprehensive agenda to tackle dangerous risks throughout today’s financial system. It starts with imposing tougher constraints on the biggest banks. But it also constrains risk beyond banks. Millions of people lost their homes and their jobs and their life savings in part because of failures at firms like Lehman Brothers and AIG – and Glass-Steagall wouldn’t do anything about that. Hillary Clinton’s plan would. And it offers a “top-to-bottom plan for policing and preventing corporate crime and financial misconduct.”

https://www.hillaryclinton.com/briefing/factchecks/2016/01/17/clinton-is-right-glass-steagall-isnt-enough/

[think]

5. Yes. It's not the entire solution. But it is PART of the solution. Investment banking & commercial

banking should not be combined.

Elizabeth Warren supports a NEW Glass Steagall:

SUPPORT THE 21ST CENTURY GLASS STEAGALL ACT

Congress passed the Glass Steagall Act in 1933 to separate risky investment banking from ordinary commercial banking. And for half a century, the banking system was stable and our middle class grew stronger.

~Snip~

Our new 21st Century Glass Steagall Act once again separates traditional banks from riskier financial services. And since banking has become much more complicated since the first bill was written in 1933, we’ve updated the law to include new activities and leave no room for regulatory interpretations that water down the rules.

The bill will give a five year transition period for financial institutions to split their business practices into distinct entities – shrinking their size, taking an important step toward ending “Too Big to Fail” once and for all, and minimizing the risk of future bailouts...

Read more:
http://my.elizabethwarren.com/page/s/glass-steagall

[yallerdawg]

6. New York Times' Andrew Ross Sorkin

One Thing Both Parties Want: To Break Up the Banks Again

This column has spilled a lot of ink on the topic of Glass-Steagall over the years, including an admission from Elizabeth Warren that reinstating the law would not have prevented a crisis in 2008. Whether reinstating the law is good idea or not, the short-term implications are decidedly negative: It would most likely mean a loss of jobs as part of a slowdown in lending from the biggest banks.

There is a reasonable argument to make that it would also put the United States banking industry at a competitive disadvantage relative to international peers, some of which face fewer restrictions. Maybe that’s all a fair trade-off for a sounder system, but the implications need to be understood on all sides. If the goal is to jump-start the United States economy and create more jobs, reinstating Glass-Steagall will most likely hinder, not help.

So what’s the chance that the law actually comes back?

Very small. But it may have an impact that has so far been largely ignored: “While lawmakers remain unlikely to re-enact the Glass-Steagall Act, we believe the big-bank bashing from both parties will eventually lead to targeted policies aimed at lessening the relative regulatory burden for regional and community banks,” Isaac Boltansky, an analyst at Compass Point Research & Trading, wrote in a note to investors.

In addition, he suggested, “Trump’s actions will likely force Clinton to compensate by reiterating and expanding her calls for increased scrutiny of the shadow banking system, which could pose additional headline risk for asset managers, global insurers and nonbank lenders.”