http://hnn.us/articles/55548.html
10-21-08
Bring Back Glass-Steagall?
By Robert Buzzanco
Mr. Buzzanco is Professor and Chairman, Department of History,
University of Houston. He is the author of Masters of War: Military
Dissent and Politics in the Vietnam Era and Vietnam and the
Transformation of American Life, and numerous other publications on
foreign policy and political economy.
Yes, as through this world I've rambled
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.
In 1933, amid the depths of the Great Depression, Senator Carter Glass
of Virginia and Representative Henry Bascom Steagall of Alabama crafted
a law to separate commercial and investment banking, the Glass-Steagall
Act. In most ways, Glass and Steagall were typical Democrats: ardent
segregationists with a populist bent for poor whites, but also connected
to monied interests and deeply motivated to save the financial system
that had fallen apart a few years earlier.
In 1999, led by Senator Phil Gramm of Texas, another southerner but
without the populist politics, and one of the best friends American
bankers ever had, congress overwhelmingly repealed the Glass-Steagall
Act and created the financial free-for-all that has led banks to offer,
along with savings and checking accounts, securities, stock sales, and
insurance. The repeal of Glass-Steagall, it is not an overstatement to
suggest, has been a principal reason for the financial crises that have
fallen upon the United States today, and shows the deep dangers of
deregulation.
One of the principal causes of the Wall Street Crash and Depression of
the 1920s and 1930s was irresponsible banking activity. Due to a
massive expansion of the economy in the years after World War I, the
corporate and financial class found itself with vast sums of surplus
capital--money that was not being invested for productive purposes.
Looking for ways to get more return on that capital, these men turned to
financial speculation. At that time, there was no separation between
commercial banking like offering bank accounts or home loans to local
communities, or investment banking like selling securities or stocks.
With a new flood of money coming their way in the early- and mid-1920s,
commercial banks themselves became more speculative, investing heavily
in the stock market, often without adequate reserves, and buying new
issues of capital for resale to the public. Banks would also issue
excess loans, often unsound, to the companies in which they had
invested, and then advise their clients to invest in those same stocks.
The result of this financial shell game, not surprisingly, was the 1929
crash of the entire U.S. and much of the global economy.
Glass-Steagall's purpose was to create a regulatory barrier between the
commercial and investment banking sectors, to assure consumers that
their money was safe (the Federal Deposit Insurance Corporation was also
part of the law), and to prevent bankers from using commercial paper to
speculate wildly on stocks-in short, to abet Franklin Roosevelt’s
efforts to save capitalism.
Twenty-three years later, in 1956, congress took the additional step, in
the Bank Holding Company Act, of separating the banking and insurance
industries by preventing banks from underwriting insurance.
Both of these regulatory acts, it is important to note, had significant
support among certain key sectors of the banking community, especially
bigger Wall Street banks and those with transnational interests (as
promoted in the Webb-Pomerene and Edge Acts of 1918-1919), that
realized that government regulation was necessary to protect larger and
more responsible banks from those which speculated wildly in the
securities, stock, and insurance industries. (Glass, in fact, had helped
create the Federal Reserve System in 1913).
Regulation, as was often the case, far from being an anti-banking
measure, and cloaked in the rhetoric of helping consumers, in fact
brought stability to the banking industry, and in particular the largest
Wall Street firms which used such measures to gain greater shares in the
industry and drive out smaller and more speculative competitors.
By the late 1990s, with the stock market surging to unimaginable
heights, large banks merging with and swallowing up smaller banks, and a
huge increase in banks having transnational branches, Wall Street and
its many friends in congress wanted to eliminate the regulations that
had been intended to protect investors and stabilize the financial
system. Hence the Gramm-Leach-Bliley Act of 1999 repealed key parts of
Glass-Steagall and the Bank Holding Act and allowed commercial and
investment banks to merge, to offer home mortgage loans, sell securities
and stocks, and offer insurance.
A financial bazaar had been opened, and financial giants like Goldman
Sachs, whose previous head, Robert Rubin, was the Treasury Secretary at
the time and whose CEO was current Treasury Secretary Henry Paulson, and
Citigroup began to gobble up brokerage firms like Smith Barney, Paine
Webber, Salomon Brothers, Merrill Lynch, and others. Globally, such
deregulation and privatization of markets also led to economic
calamities in Chile’s Social Security system and the Asian currency
crisis of the late 1990s. Here in Houston, I began to notice on
seemingly every block a new bank being built, particularly Washington
Mutual and Comerica. Something was clearly afoot.
This new banking system has marked the final phase in the
"financialization" of the U.S. and world economy, an evolution in which
commodity production and trade has been replaced as the dominant economy
activity by the actions of financial markets, which has brought with it
huge debt--both public and consumer--and massive deficits in relation to
the central banks of Europe and Asia-and China in particular, which now
holds nearly 1.5 trillion U.S. dollars. Indeed, there seems to be
evidence that foreign creditors such as Saudi Arabia and the Asian
central banks have lobbied vigorously for the current bailout plan.
The repeal of Glass-Steagall specifically, and the orgy of financial
deregulation more generally, has created the subprime mortgage, banking,
and stock market crises of 2008 today, and may very well create an
upheaval in the insurance industry shortly. Deregulation, under the
guise of celebrating the "free" market, not only damaged consumers, but
caused disarray in the industries that it was intended to help--banking,
securities, stocks, insurance--by allowing for renewed speculation,
unsound mergers, and irresponsible lending.
The problem today is probably too large for a new version of
Glass-Steagall to fix it. The global financial system–with derivatives,
hedge funds, collateralized debt, and other such economic alchemy has
moved far beyond the days of commercial and investment banking. But it
should be absolutely clear that the government has to have a
much-increased role in regulating banks and securities firms, and in the
economy as a whole.
Many, such as Senator John McCain and ex-Senator Gramm, his chief
financial advisor, have boasted of being "deregulators" and have
complained that government rules on the financial sector have actually
damaged the market by limiting economic activity. The Clinton
Administration believed, and acted, likewise. In truth, those
regulations, today as much as in the 1930s, were meant to stabilize the
system and protect the banking and corporate class, often against
themselves [one of Herbert Hoover's favorite quotes was "the problem
with capitalism is the capitalists-they're too damned greedy," and he
generally, and unsuccessfully, supported banking regulation as Commerce
Secretary].
Banking regulations must be reinstituted as a first measure to address
the current crisis. Bailouts without reform are merely multi-billion
dollar welfare checks to those who need them the least. In fact,
American International Group has already used $61 billion of its $85
billion taxpayer bailout, mostly to stop the bleeding in its structured
finance unit and securities lending business, and the company’s debt has
already been downgraded by Moody’s. Due to changes in oversight rules
by the Securities and Exchange Commission, the leverage ratio of the
biggest banks, the measure of a firm’s debt compared to total assets,
has risen to 30:1 or more in many cases, where it used to be in the
15-20:1 range. In the past week A.I.G. asked for another $38 billion.
In the 1930s, Glass and Steagall believed that the government had to
step in to rescue the banking system in its darkest hours, but the New
Deal did incorporate such “top down reform” with some benefits for the
working classes and the poor. Unfortunately, the attack on public
institutions has become overwhelming and the private enterprise system
(there’s nothing “free” about it) so entrenched that the problems we
face today are more acute and the need for control of the banking system
more urgent than ever. Glass and Steagall had it right in the 1930s and
some updated version of that needs to reappear today. No other
institution exists with the clout or the ability to coerce financial
institutions but the state, and its ability to do so has been so
diminished in the past quarter-century (and its will even more so) that
any actions taken by government, such as the recent bailout, are not
likely to restructure the economy in any meaningful way.
Still, working people’s pensions, not to mention jobs and wages and
savings and checking accounts, are at stake, and something has to be
done. Bring back Glass-Steagall, updated for modern times, and from
there reawaken the spirit of Upton Sinclair and Huey Long. Our times
are becoming so desperate, it just might work.
And as through your life you travel,
Yes, as through your life you roam,
You won't never see an outlaw
Drive a family from their home.
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