McCain wants to resurrect Glass-Steagall

December 17, 2009

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.

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*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.”

Comments

Great article! Consider me a fan, Rolfe. I authored this for Seeking Alpha today, that speaks along similar lines.

. . http://seekingalpha.com/article/178621-w e-must-reinstate-glass-steagall

 

The duality concept of democrats and republicans are no longer useful in distinguishing who is who and what is what. It’s a concept too simplified in this messy time of ours.

Posted by Lim | Report as abusive
 

There is no proof the repeal of Glass Steagall had anything to do with the crisis. Look at any STATISTICAL study on a country by country basis all but proves this thesis. The US is one of the only countries in the world that had such a law over the past century, and it didn’t do anything before it was repealed to increase the stability of American banks versus other countries.

There are far more worthy targets to attack than the Glass Steagall myth. The FDIC, the Fed, the ‘Too Big to Fail Myth’ (which, by the way, includes institutions which wouldn’t have been restricted whatsoever by Glass Steagall).

The banking industry has far too many subsidies, and then is given the biggest subsidy of all, it can’t fail! Focusing on a statistically irrelevant regulation misses the point entirely.

Posted by Danny Kenny | Report as abusive
 

Danny:

I think that TBTF and the Glass-Steagall repeal are at least somewhat complimentary to each other. I feel — at least from a layman’s perspective — that by allowing banks to operate in any fashion they choose, you are raising the risk of the FDIC having to make a payout. I think when Glass-Steagall was enacted concurrently with the FDIC that deposits were inherently safer because banks could not use those deposits for risky purposes. I’m not too informed on the affects the Glass-Steagall act though and this is all conjecture.

Additionally, I think that the repeal of Glass-Steagall is more symbolic in that it just shows that we were moving in the wrong direction. I am personally for laws that go far beyond Glass-Steagall so I think that its reenactment is an important first step.

Posted by Sean | Report as abusive
 

“Did we elect the wrong guy?” – “We” didn’t; I voted against him . . .

Posted by wrc1000 | Report as abusive
 

Gotta go w/ Danny on this one. Glass-Steagall’s a scapegoat, like Bernanke. Feels like misdirection for the masses to maintain status quo.

 

Danny/million…..I agree with you both….have added this graf:

“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. 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 the assets, none of which should be involved in high-risk trading activities.”

Posted by Rolfe Winkler | Report as abusive
 

There’s an even worse problem, Rolfe. How do we separate trading from “commercial banking”? Are we going to not allow MBS anymore? That’d be odd since the government is now the biggest player in MBS.

Haven’t we learned everything but Treasuries is “high risk”? (Indeed, even Treasuries may turn out to be “high risk”).

 

What a RIOT that McCain guy is! He knows there is no chance of it passing, so why not POSTURE by proposing it!!! Of course Bernie Sanders and some other fringe figures have proposed it too, so don’t think this is an “idea so good only a Republocrat could have it”.

I say “no chance” because putting the genie back in that bottle would entail breaking up VERY LARGE mega-banks and vaporizing many TRILLIONS of dollars of derivatives in the breakups. All the evaporation of that fantasy money would shatter the financial oligarchy and that is decidedly NOT going to actually happen.

Posted by Vicente | Report as abusive
 

McCain’s financial advisor Phil Gramm was a key player of the Commodities Futures Modernization Act which gutted Glass-Steagall.

Now he’s found religion, apparently.

 

What elected officials say Rolph and what they do are two different things. The power of the big banks is almost impossible to break. Not only because of the cloke of secrecy that surrounds them but because of the absolute control they have over a nation’s money supply.
They hold sway over the President and the congress and will lobby extensively to block any interuptions to their agenda.I was quite excited that America elected its First black President but after much consideration it looked too easy. I suspect if the banks felt threatened by him he never would have even gotten the nomination. I admire the President and appreciate much of what he claims to stand for but I believe when elected officials have to ask the Central bank for the money supply they need they are not soverign but in effect puppets to the Federal reserve. More and more people are becoming aware of this and since every nation has a central bank they are in effect no longer sovereign.
Monetizing debt is legalized counterfitting; if you or I did it we would go to jail. Ben Bernanke does it and he gets his picture on the cover of a major magazine and is named man of the year.

Posted by James | Report as abusive
 

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