The emergency legislation that was passed within days of President Franklin Roosevelt taking office in March was just the start of the process to restore confidence in the banking system. Congress saw the need for substantial reform of the banking system, which eventually came in the Banking Act of , or the Glass-Steagall Act. Henry Steagall D-AL. Glass, a former Treasury secretary, was the primary force behind the act. Steagall, then chairman of the House Banking and Currency Committee, agreed to support the act with Glass after an amendment was added to permit bank deposit insurance. Glass originally introduced his banking reform bill in January
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Until it was formally repealed in , the Glass-Steagall Act required a separation between depository banking and investment banking and later, insurance companies. In recent years, the idea of resurrecting the law has had surprising support across the political spectrum.
Progressive Democrats have advocated for its reinstatement consistently since the financial crash of The official Republican party platform embraces bringing back Glass-Steagall. Former heads of Citigroup have said it was a mistake to repeal the law.
And, for a time at least, the Trump administration seemed open to the idea of revival. This is true, but hardly a sufficient criticism. There is truth here too. But it was a contributing factor. The watering down and ultimate repeal helped further year trends in the financialization of the economy and the consolidation of the financial sector into a smaller and smaller number of dominant firms — factors that indirectly precipitated the crisis.
Still, nothing important turns on this criticism because it is based on a cardinal mistake about public policy. People who focus only on the causes of the crash when thinking about financial regulation seem to think that the sole purpose of financial reform is to plug holes in a regulatory system in the narrowest possible way.
But this is the equivalent of military strategists after the first world war building the Maginot line to prepare for trench warfare.
The core of the case for Glass-Steagall starts with asking a broader and more farsighted question of public policy: how should the financial sector be structured? The case for reviving Glass-Steagall is based on two different premises.
The first is a general opposition to concentrated economic and political power that is normally associated with anti-monopoly thinking. As applied to the financial sector, these fears were ahead of their time. The crash focused attention on the ballooning size of the big banks, and solutions, like Glass-Steagall and capping the size of banks, were widely debated. Indeed, we can think of a modern Glass-Steagall as something like a ban on mergers that create conglomerates.
The purpose is to fragment power. When firms are smaller and separated by function, it is more likely there will be competition along specific business lines. Take a financial startup that wants to enter the depository sector.
It will be harder for that startup to compete with conglomerates that can cross-subsidize business lines. Too much economic power spills over into politics, giving massive firms an advantage in lobbying Congress or influencing regulators. In other words, concentration makes it more likely that government gets captured by corporate behemoths and that regulations are written to stack the deck in their favor.
The second premise is that we should break up big financial institutions by separating their functions, rather than by capping their size though it is not necessarily inconsistent to support both — and some proponents of Glass-Steagall do. There are many reasons to desire a financial sector that is fractured by function.
It can help reduce the risk of contagion — of a business infected with bad bets taking down the entire financial system.
It will also make firms smaller though it would still be possible to become large within a single business line. Together these factors make the financial system less susceptible to systemic risk.
Separation along functional lines also has a variety of legal and political benefits. It will improve the ability of regulators to monitor and regulate financial entities, indirectly making simpler regulations more viable. It also breaks up political power based on different kinds of financial activities, meaning that lobbyists for different parts of the financial system are more likely to find themselves on opposing sides of policy questions.
That should, in turn, enable policymakers to design smarter and fairer regulations. Financial institutions themselves might also benefit from such separation. With fewer divisions and complex structures, management will have an easier time preventing the next London Whale. Indeed, employee culture within these institutions would likely change over time. Of course, there are drawbacks to reviving a Glass-Steagall-like regime.
For example, monopoly-sized firms and massive conglomerates are more likely to offer one-stop shopping and can more seamlessly integrate financial practices for customers. But any effort at making public policy has tradeoffs. The question for critics of a modernized Glass-Steagall is why they think these tradeoffs significantly outweigh the benefits of a financial system that is less concentrated, more competitive, easier to regulate, and that has less political power.
If they want to make the case against Glass-Steagall, they must confront this question head on. Facebook Twitter Pinterest.
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The Secret History of Glass-Steagall
The Glass-Steagall Act is a law that separated investment banking from retail banking. They facilitated mergers and acquisitions. Many of them operated their own hedge funds. Retail banks took deposits, managed checking accounts, and made loans. By separating the two, retail banks were prohibited from using depositors' funds for risky investments. They could underwrite government bonds. Most important to depositors, the act created the Federal Deposit Insurance Corporation.
The case for Glass-Steagall Act, the Depression-era law we need today
The Glass—Steagall legislation describes four provisions of the United States Banking Act of separating commercial and investment banking. The separation of commercial and investment banking prevented securities firms and investment banks from taking deposits, and commercial Federal Reserve member banks from:. Starting in the early s, federal banking regulators' interpretations of the Act permitted commercial banks , and especially commercial bank affiliates, to engage in an expanding list and volume of securities activities. By that time, many commentators argued Glass—Steagall was already "dead". Some commentators have stated that the GLBA's repeal of the affiliation restrictions of the Glass—Steagall Act was an important cause of the financial crisis of —
The Glass-Steagall Act, part of the Banking Act of , was landmark banking legislation that separated Wall Street from Main Street by offering protection to people who entrust their savings to commercial banks. Millions of Americans lost their jobs in the Great Depression, and one in four lost their life savings after more than 4, U. As the Great Depression of the s devastated the U. By June 16, , President Franklin D. The Glass-Steagall Act set up a firewall between commercial banks, which accept deposits and issue loans, and investment banks that negotiate the sale of bonds and stocks. As chief counsel to the U.
Trump calls for '21st century' Glass-Steagall banking law
The Glass-Steagall Act was passed by the U. Congress in as the Banking Act, which prohibited commercial banks from participating in. The case for reviving the Glass-Steagall Act has surprising support across the political spectrum. The Glass-Steagall Act effectively separated commercial banking from investment banking and created the Federal Deposit Insurance Corporation, among other. Threads collapsed expanded unthreaded. It will also make firms smaller though it would still be possible to become large within a single business line.
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