Reinventing Glass-Steagall

December 17, 2009

With Congress already debating a sweeping overhaul of financial regulation, perhaps the most enduring regulatory stricture of the Depression era is again getting an airing in Washington. The venerable Glass-Steagall laws that barred large banks from affiliating with securities firms and engaging in the insurance business were repealed in 1999. Now, as the banks try to move on from the dreaded salary caps and the humiliation of TARP, lawmakers are wondering whether getting rid of Glass-Steagall was such a good idea.

Financial giants such as Goldman Sachs could be broken up under two bills introduced in Congress on Wednesday, one with the backing of former Republican presidential nominee John McCain. Both would reinstate Glass-Steagall. Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo — to spin off investment and insurance operations, according to Demos, a progressive think tank in New York. A similar measure was offered on Wednesday by six Democrats in the House of Representatives.

To be fair, many have wondered whether dumping Glass-Steagall was such a good idea. What’s odd is that the discussion about bringing it back comes as almost an afterthought to the massive regulatory reform bill now before Congress. Rather than start from scratch, it may have made more sense to try to reinstate laws that the marketplace was already familiar with, and add new bits around the edges.

While the banks may think they are strong enough to shed TARP, it’s hard to see how they would survive the cleaving of Glass-Steagall at this stage of their recovery. Perhaps by forcing the sector to resplit itself, the remaining banks would be forced to go back on TARP. While that might have some political appeal, analysts say restoring Glass-Steagall is probably a non-starter because it would be seen as stoking unemployment. Going back to more Depression-era regulation would also be difficult to sell as a progressive approach to modern day problems.

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It may be impossible to put that “genie back in the bottle”, but the government needs to enact some meaningful legislation that forces these financial institutions to be responsible for themselves. The public certainly has not benefitted from all the money given to these institutions. Naysayers to any regulation will counter that this money kept us from a depression, but they fail to show how any but the finanacial institutions have gained. The FED now hides all the Toxic Assets within its (hidden) balance sheets and somehow thinks we who are actually paying for this bailout will forget. Durbin may have been 100% correct when he stated that Wall Street runs the government. A very sad state of affairs for a once great nation.

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