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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 21, 2011 at 10:00 AM

The cure for bad banking

House Resolution 1489 would repeal much of the 1999 banking deregulation that did so much to seed our recession/depression and return to Glass-Steagall. It doesn’t stand a snowball’s chance in Gila Bend, Ariz., of passage, but you should know it’s there.

Glass-Steagall was one of the monumental achievements of the New Deal that separated investment banking, which seeks risk and speculation, from commercial and retail banking, where individual accounts were protected by newfangled FDIC insurance. As with the run-up to the panic of 2008, the 1920s saw banks gambling in unstable investments and outright frauds. When the market crashed in 1929, the cascade effect nearly destroyed the banking system and was a major cause of the Great Depression. For the next 50 years under Glass-Steagall, America never again faced a banking crisis that could bring down the economy.

The Gramm-Leach-Bliley Act of 1999, which was actively supported by President Clinton and his banker Treasury Secretary Bob Rubin (and successor Larry Summers), put an end to that. Along with other deregulation, it allowed for the rise of giant national banks with large investment banking arms, as well as a host of other dangerous plays, from derivatives to the rise of the shadow banking system. The result: A huge speculative bubble, the resulting Great Recession and the near collapse of the world economy. Rubin went on to join Citigroup, a poster child of deregulation, and pocket tens of millions in compensation. Nicely played, Bob (he would later admit in an interview that he didn’t understand some of the complex derivatives that blew up).

HR 1489 would rebuild the wall of safety that worked so well. Commercial banks would be confined to the dull world of banking, such as making loans to business, while investment banks could gamble — but with no guarantee that taxpayers will rescue them. As I say, there’s little chance of passage. The banksters that own D.C. are out to repeal the very mild “re-regulation” of Dodd-Frank, while little has changed in their dangerous structure, size and practices.

Unfortunately, the capital markets have so slipped the leash of safety, soundness and common sense, that a 21st century Glass-Steagall would have to much further. Among other things, it would have to break up the too-big-to-fail banks; make investment banks smaller and more prudent; regulate the shadow banking system; reign in derivatives and toxic compensation that rewards unproductive risk taking and trading; insist on aggressive and independent regulators; put in place incentives to provide capital to job-creating enterprises, and — big lift after Citizens United — get banking money out of politics.

But 1489 shows that some solutions are out there. It’s just a question of whether enough Americans will insist that they be implemented.

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