With the credit crisis brought on by the subprime lending fiasco expected to cost the American economy $350 billion this year and next, Financial Security will be a very big issue for the presidential elections. Somebody recently called it "perfect storm of financial unease" building across the nation.
Looking at how we got from there to here, we're always reminded of the Great Depression and how rampant, unregulated greed brought in its wake great suffering, poverty, hunger, homelessness, and joblessness for very many Americans. In the New Deal era, as we know, government stepped up with social and public works programs to help bring on economic recovery and strict banking laws and federal regulations to prevent the financial services industry from re-forming itself into another engine of economic catastrophe.
A familiar example of such consumer-protective legislation beginning in that era is FDIC, insuring bank deposits for account holders. But there was a whole collection of laws enacted then that were consumer and market protective, which came under the general heading of "Glass-Steagall" that restricted financial services such as banking, insurance, stock brokerages, etc. from running entirely hog wild and causing a New Great Depression.
Frontline did a documentary and the
PBS site gives very good background on all of this on a page called "The Wall Street Fix."
The Long Demise of Glass-Steagall
A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weill dealt the coup de grâce.
Glass-Steagall Act creates new banking landscape
Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.
In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthens the Federal Reserve’s control over credit.
The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.
In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.
The financial services industry spent most of the 20th century lobbying away at these laws and diminishing them until finally in 1999 they succeeded in having them repealed by Congress.
On Mother Jones' list of
Top 10 Worst Corporations of 1999:
Citigroup: The standard in political corruption
Citigroup played the lead role in ushering the "Financial Services Modernization Act" through the US Congress, in the process joining with the rest of the financial services industry to set a new standard in legalized bribery. The Act will tear down the regulatory walls between banks, and insurance companies and securities firms, paving the way for a massive concentration of financial wealth and a future of industry bailouts, weakening the Community Reinvestment Act and permitting huge intrusions on consumer privacy.
S.900: Financial Services Modernization Act of 1999 had only 8 Nays in the Senate; clearly, many good liberal Democrats saw it as a good law, but these eight didn't:
NAYs —8
Boxer (D-CA)
Bryan (D-NV)
Dorgan (D-ND)
Feingold (D-WI)
Harkin (D-IA)
Mikulski (D-MD)
Shelby (R-AL)
Wellstone (D-MN)
Others saw the danger, too. Molly Ivins wrote in
Mother Jones:
As a member of the Senate Finance Committee and the recipient of enormous banking contributions, Gramm did an even bigger favor for the financial industry in 1999 when he sponsored the Financial Services Modernization Act allowing banks, securities firms, and insurance companies to combine. The bill weakened the Community Reinvestment Act, which requires banks to help meet the credit needs of low- and moderate-income neighborhoods. Gramm described community groups that use the CRA as “protection rackets” that extort funds from the poor, powerless banks. The bill is also a disaster for the privacy of bank customers and weakens regulatory supervision. As Gramm proudly declared, “You’re not going to find a single bank, insurance company, or securities company that will say they were hurt financially by this bill.”
The line from repeal of "Glass-Steagall" to the Financial Services Modernization Act to the current credit crisis is surely not as straight as it might seem, but this week a Market Watch columnist at least asks the question, "Would Glass-Steagall save the day from credit woes?"
Time was when banks and brokerages were separate entities, banned from uniting for fear of conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things.
In 1999, the law banning brokerages and banks from marrying one another -- the Glass-Steagall Act of 1933 -- was lifted, and voila, the financial supermarket has grown to be the places we know as Citigroup, UBS, Deutsche Bank, et al.
But now that banks seemingly have stumbled over their bad mortgages, it's worth asking whether the fallout would be wreaking so much havoc on the rest of the financial markets had Glass-Steagall been kept in place.
Diversity has always been the pathway to lowering risk. And Glass-Steagall kept diversity in place by separating the financial powers that be: banks and brokerages.
-snip
Glass-Steagall would have at least provided what the first of its names portends: transparency. And that is best accomplished when outsiders are peering in. When every one is on the inside looking out, they have the same view. That isn't good because then you can't see things coming (or falling) and everyone is subject to the roof caving in.
-snip
Glass-Steagall forced separation. Something like it, where conflicts and losses can be mitigated, should be considered again.
More:
http://www.marketwatch.com/news/story/would-glass-steagall-save-day-credit/story.aspx?guid=%7B3AA33D85%2DAD38%2D41B4%2DB300%2D033235B5734A%7DIt makes sense to me. Our candidates need to be out front on this issue, because alongside national security it's going to be all about financial security in 2008. As Congress repealed Glass-Steagall, helping the financial services community do its damage, they can repeal the Financial Services Modernization Act of 1999 and help the rest of us, right or wrong?
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