McCain wants to resurrect Glass-Steagall
Did we elect the wrong guy? While Obama follows the Bernanke/Geithner/Summers line that banks be backstopped lest their failure cause economic Armageddon, John McCain has seized the moment with a proposal to resurrect Glass-Steagall.
To be sure, this proposal isn’t going anywhere. Certainly not now. Neither the House nor the Senate reform bill proposes the sort of separation of commercial banking, investment banking and insurance that McCain is looking for.
But how interesting to see the vanquished (Republican!) presidential candidate take a more aggressive line than Obama on the too-big/complex/interconnected-to-fail issue.
While Obama hectors “fat-cats,” his reform proposals mostly serve their interests. On derivatives? End-user exemptions that offer a major loophole to protect OTC dealers. On consumer protection? A CFPA that can’t prevent the marketing of misleading financial products. On resolving big banks? A DIF-like fund to bankroll resolutions that, in practice, will merely signal that big banks are backstopped.
How did Obama miss the boat? Left, Right and Center, Americans are united in their disgust of how economic policy now serves financial innovators first and society second.
Obama had a remarkable opportunity to act this past March. Bank stocks had sunk to new lows while calls rose up for a “Swedish solution” — effectively to nationalize/recapitalize insolvent big banks. That’s not socialism, it’s what FDIC does roughly 3 times each week. Obama cogently articulated why that was preferable to the “Japanese” alternative of propping up zombies.*
Yet the Japanese non-solution is the policy he’s chosen.
Critics say it would be difficult to resurrect Glass-Steagall. No doubt that’s true. McCain’s proposal would have JP Morgan divest itself of Bear Stearns while separating from Chase; Bank of America would have to dump Merrill; Citi would certainly be broken apart; Goldman Sachs and Morgan Stanley would lose bank holding company status that gives them access to the Federal Reserve as their lender of last resort.
Hard, yes, but certainly preferable to being held hostage by these firms. They’ve not the strength to stand on their own, not without Fed and Treasury crutches. We can count on government to ride to their rescue again the next time they blow up.
Critics would also say that resurrecting Glass-Steagall isn’t a panacea. And they’re right. Bear Stearns didn’t have a commercial bank of course. Though not sufficient — see again exchange trading for OTC derivatives — separating the payment system from high-risk trading is certainly necessary. Just ask Paul Volcker.
If taxpayers are insuring the liabilities of commercial banks via FDIC and of bank holding companies via the Fed’s discount window, we’ve a responsibility to control their assets, none of which should be at risk with trading.
It’s certainly easy for McCain The Maverick to propose a popular measure he knows isn’t going anywhere. Yet some of us thought Obama was precisely the kind of candidate who would push for, and deliver, a similarly far-reaching brand of reform. To date we’ve been proven wrong.
*From FT, 2/17/09, Bank nationalization gaining ground:
Mr Obama last weekend made clear he was leaning more towards the Swedish model than to the piecemeal approach taken in Japan, which many would argue is the direction US public policy appears to be heading.
“They [the Japanese] sort of papered things over,” Mr Obama said. “They never really bit the bullet . . . and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.”