States urged to restore Glass-Steagall
“The moment of truth has arrived. It is literally a choice between Glass-Steagall and mass starvation and death.”
This got my attention, and even though I thought I knew something about the New Deal law that imposed legal barriers on affiliation of commercial banks, investment banks and insurance companies, a warning of this magnitude in a flyer handed out by a nicely-dressed young man as I boarded the bus this morning is something not easily dismissed.
Sen. Carter Glass, D-Va., had been secretary of the Treasury, and Rep. Henry Steagall, D-Ala., chaired the House Committee on Banking and Currency. Legislation which bore their names was passed in 1932 and 1933 to separate commercial and investment banking, at a time when many economists subscribed to the idea that the 1929 stock market crash was at least partly due to banks trading in high-risk securities with their depositors’ funds. The provisions which prevented depository institutions from engaging in securities transactions were repealed in 1999 by the Gramm–Leach-Bliley Act with then-President Bill Clinton’s blessing. He and others later argued that the ability of banks to buy securities dealers mitigated the 2008 collapse in financial markets.
“The vast majority of Americans want a return to Glass-Steagall,” according to the mini-white paper published for this occasion by the LaRouche PAC. Since attendees to the annual meeting of the National Conference of State Legislatures (NCSL) meetings had been assured the day before that Americans generally know more judges on “American Idol” than justices on the U.S. Supreme Court, I was pretty sure that American concerns about the current economic doldrums were more personal. Upon reflection, however, I’m sure I could write a poll question asking if people in this nation are content “to continue to bail out this vast bubble of gambling obligations on the back of a collapsed and rapidly shrinking economy…(creating)…an economic crisis of Dark Age proportions,” which might produce the desired response. (I don’t have the actual poll question. The quoted language appears in a pamphlet entitled “The Full Recovery Program for the United States” published in June by the Lyndon LaRouche Political Action Committee.)
Thomas Hoenig, a director of the Federal Deposit Insurance Corp., who served at the Federal Reserve for 38 years, was in 2010 one of the five Fed bank presidents to serve on the Open Market Committee. Hoenig has supported reinstating “Glass-Steagall-type” laws. During the Dodd-Frank Senate debate, he wrote Sens. Maria Cantwell and John McCain, co-sponsors of one reinstatement effort, urging an inquiry into “the unintended consequences of leaving investment banking commingled with commercial banking.” Dodd-Frank eventually included the “Volcker Rule” which prohibits “proprietary trading” of non-government securities, but allows ”market-making” as a permissible customer service. Most interestingly, one of the major architects of financial deregulation, former Citigroup CEO Sandy Weill, called for splitting up investment banks and commercial banks in a 2012 CNBC interview.
I decided to pay a visit to the committee where fireworks would signal this reinstatement effort.
It is pretty much the fashion nowadays for state lawmakers in conference to allocate considerable time writing letters (resolutions) to their counterparts in the federal Congress to urge them to consider solutions which the states are either trying themselves, or feel that a federal law might more effectively address. Rep. Marcy Kaptur from my home state of Ohio and Sen. Tom Harkin of Iowa have both introduced a version of the Return to Prudent Banking Act of 2013. Half of the states have introduced resolutions calling upon their federal representatives to support it. This resolution would be on behalf of all the states, through their national taxpayer-supported association.
The NCSL Communications, Financial Services and Interstate Commerce Committee concluded its regular order of business and the tension in the room increased as the senator from Delaware who sponsored the Glass-Steagall restoration resolution introduced the president of the Detroit School Board. He put Detroit’s current financial embarrassments squarely at the feet of megabank-induced investment in “interest-rate protection products” that proved “ruinously expensive to the city.” His testimony made the case that Detroit faces the choice now between providing retiree health and pension benefits or paying off bad bets on interest-rate swaps.
Eventually, the resolution was withdrawn. The sponsor informed the committee that the Delaware delegation had made a joint decision. The committee proponents and their supporters around the room noted the rush of phone traffic to committee members. The young woman sitting next to me (a candidate for New Jersey governor on the LaRouche Independent ticket) said that a huge global bank had threatened to pull thousands of jobs out of Delaware during Senate testimony in that state if it pursued reenactment.
It has been discovered that some public money managers have taken inappropriate risks to boost yields in a lengthy period of low interest rates. The J.P. Morgan “London Whale” indictments came down this week. Both Sarbanes-Oxley and Dodd-Frank were congressional reactions to serial investigations into large companies which tried to defy the laws of economics or mathematical laws of probabilities at the expense of large numbers of taxpayers.
The overarching conservative principle that sophisticated investors should not be overregulated by restrictions on their authority may be increasingly subject to erosion as the bad news piles up.
The proponents seemed to be largely people who were financially literate, even though inclined toward hyperbole and conspiracy. Politics often trumps good economics, and people who work around laws are at least as smart as the people who make them. I think this may turn into a serious debate as the economy sputters and more bad decisions are blamed on Wall Street financial institutions.