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Jon Talton

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

July 12, 2013 at 10:25 AM

A new Glass-Steagall: A good start

A bi-partisan group of senators wants to bring back Glass-Steagall. Good on Elizabeth Warren, John McCain, Maria Cantwell and Angus King. The proposed legislation would separate federally insured banks that offer checking accounts, loans, etc. from institutions that want to do risky investment banking, as well as hedge funds, private equity, swaps and insurance. It won’t solve the too big to fail problem, but it’s a good start. At the least, it would cut back moral hazard, where bankers know their profits will be privatized but losses socialized, that another crisis will bring another bailout.

The old Glass-Steagall was passed in 1933 after risky bank practices, especially selling stocks and gambling in the market, helped bring on the crash of 1929 and the Great Depression. The bill established the Federal Deposit Insurance Corp., putting an end to the runs on banks that had characterized the frightening period from 1929 to 1933. But as importantly, it prohibited federally insured banks from risky investment banking. Thus, a firm such as Goldman Sachs couldn’t count on taxpayers bailing out their bad bets. Glass-Steagall prevented another major banking crisis through the rest of its existence. Slowly eroded, it was finally repealed entirely in 1999 by legislation not only pushed by Republicans Phil Gramm and Jim Leach but Democratic President Bill Clinton and his Treasury Secretary Robert Rubin, a former investment banker. This was a generation of leaders that had no memory of the Depression, but had received plenty of money from the banks and Wall Street.

This deregulation provided no protection against a return to the dangerous practices that helped detonate the Depression. Indeed, the rise of risky derivatives trading, although highly profitable, was barely regulated at all. Regulators were co-opted by the lobbying might of the “financial services industry.” It took only seven years to create another massive crisis that brought the world financial system to the edge of collapse. Had Glass-Steagall remained in place, we’d still have Washington Mutual.

We need a new Glass-Steagall, but we need more. We need regulation of the derivatives trade, most of which are not useful hedges but are just gambling by moving money around. A transactions tax would be helpful, too, as an incentive for using capital for productive ventures than for gambling. We need a return to healthy investment banking.  And the TBTFs, which continue to pose a threat to the system, need to be broken up. You’ll hear much fear-mongering and “it can’t be done.” Don’t believe it. The banksters will flood Congress with even more money. You need to push back, contacting your representatives and senators. This new legislation marks a beginning in finally fixing the roots of the Panic of 2008 and a financial industry out of control.

This Week’s Links:

Elizabeth Warren’s long game against Wall Street | NY Magazine

How climate change makes it harder to keep the lights on | Wonkblog

Banks win again: CFTC caves, SEC opens door wide to fraud | Naked Capitalism

The costs of ‘good’ economics | Baseline Scenario

Potential for deals drives a big surge in biotech | NY Times

Bernanke calls out the obscure but influential theory that helped cause the crash | BusinessWeek

The E-book conspiracy comes to a close | The New Yorker

The Internet is destroying work and turning the old middle class into the new proletariat | Salon

Explaining the bond-market selloff | The Economist

The right green industrial policies | Project Syndicate

Today’s Econ Haiku:

Microsoft reorg

Big ship won’t turn easily

But it can be done

Comments | More in Banking | Topics: banking, Elizabeth Warren, Glass-Steagall

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