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Jon Talton

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

Topic: Elizabeth Warren

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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 Slowly eroded, it was finally repealed entirely in 1999 by legislation not only pushed by Republicans Phil Gramm and Jim Leach but Democratic President Bill Clinton and his Treasury Secretary Robert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.

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