PARALLEL UNIVERSE: Robert Reich, Clinton’s Best Cabinet Member, Agrees With Me on the Wisdom of Bringing Back Glass-Steagall

  • By David M. Kinchen

As I’ve said before, it’s long past time to bring back the 1933 Glass-Steagall legislation that was scrapped in 1999 and “replaced” with Gramm-Leach-Bliley. I’ve blogged on this subject so much my fingers are raw! Now comes Bill Clinton’s best cabinet member, Robert Reich, who says the same thing: Link:
http://www.nationofchange.org/how-jp-morgan-chase-has-made-case-breaking-big-banks-and-resurrecting-glass-steagall-1336830881.

Mark that date, 1999. Bill Clinton was the president and, at the urging of Treasury Secretary Robert Rubin — like virtually all of the recent treasury secretaries, a creature of Wall Street — Congress scrapped much of Glass-Steagall, which separated commercial and “investment” banking, and replaced it with a pale copy called Gramm-Leach-Bliley. Retained was the Federal Deposit Insurance Corp. (FDIC), which was part of Glass-Steagall.

Reich, now a professor at the University of California at Berkeley, made his thoughts known in the wake of news that J.P. Morgan Chase & Co., the nation’s largest bank, announced Thursday “that it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets.”

Reich: “Ever since the start of the banking crisis in 2008, [Chase CEO Jamie] Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).” 

Reich, secretary of labor in the Clinton administration, added, and I couldn’t agree more, that: “… let’s also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.”

 

We don’t need banks that are “too big to fail.” If they get that big, they should be broken it, to reduce the stress on the already shaky financial structure that prevails in the U.S. — and most other countries.

 

I Googled myself (sounds nasty, doesn’t it?) on the Huntington News Network site and discovered 19 references by me to Glass-Steagall (link: http://www.google.com/search?q=glass-steagall&sitesearch=huntingtonnews.net), some in commentaries and many in book reviews. This commentary brings me to an even 20.

 

Here are a few comments from some of those commentaries:

 

From May 19, 2010:

“I’ve made no secret of my wish to see the reinstatement of the 1933 Glass-Steagall Act that was sadly dismantled in 1999 in the Clinton Administration. My argument for bringing back Glass-Steagall was voiced in my book review of “Complicit” by Mark Gilbert, who said the repeal of the legislation which separated commercial banking from much more speculative “investment” banking contributed to the meltdown. 


“Here is a link to the review: http://archives.huntingtonnews.net/columns/100210-kinchen-columnsbookreview.html

“Just about the only part of G-S that was retained was the Federal Deposit Insurance Corp., which insures bank accounts. Even the fanatics in the White House and Congress couldn’t do away with the FDIC!

“Nouriel Roubini, professor of economics at New York University’s Stern School of Business, was dubbed “Dr. Doom” a few years ago for predicting an economic collapse. Nobody is calling the author of the new book “Crisis Economics” Dr. Doom these days. In a story I found on AlterNet (link:http://www.alternet.org/story/146900 nouriel_roubini%3A_how_to_break_up_the_banks%2C_stop_massive_bonuses%2C_and_reign_in_wall_street_greed) Roubini called for the rejection of the Volcker Rule, which he calls “Glass-Steagall-Lite” and reinstatement of the original Glass-Steagall: ‘We need to go all the way and implement the kind of restrictions between commercial banking and investment banking that existed under Glass-Steagall,’ he told AlterNet economics editor Zach Carter.

“Economies of scale produced ‘disasters’ like Goldman Sachs and Morgan Stanley, he said, saying that ‘the model of the financial supermarket where within one institution you have commercial banking, investment banking, underwriting of securities, market-making and dealing, proprietary trading, hedge fund activity, private equity activity, asset management, insurance — this model has been a disaster. The institution becomes too big to fail and too big to manage.'”

 

From Feb. 10, 2010:

“Named for its Congressional sponsors, Glass-Steagall was enacted in 1933 during the Great Depression to separate commercial and investment banking — to separate the “boring” commercial banking from the “exciting” — and risky investment banking that prevailed during the bubble period of the 1920s that contributed to the stock market crash of 1929. 


“Naturally, banks, including Bank of America, have opposed the re-introduction of the parts of the act that were repealed more than 10 years ago.

“In December 2009, Republican Sen. John McCain of Arizona … and Democratic Sen. Maria Cantwell from the great state of Washington, jointly proposed re-enacting the Glass-Steagall Act. Legislation to re-enact parts of Glass-Steagall was also introduced into the House of Representatives.

“Former Federal Reserve Chairman Paul Volcker — currently an advisor to President Obama — has also been an outspoken fan for the reinstatement of many aspects of Glass-Steagall.


From Feb. 18, 2012 (in a review of “Financial Turmoil in Europe and the United States” by George Soros:

I was disappointed that Soros didn’t discuss the financial deregulation under the Democratic administration of Bill Clinton, other than mentioning that the scrapping of the Glass-Steagall act in 1999 is an event that most likely cannot be reversed. This Great Depression era legislation created the Federal Deposit Insurance Corporation (FDIC) and separated commercial and investment banks. On Page 50 Soros writes in the essay “The Three Steps to Financial Reform” (Financial Times, June 10, 2009) that ‘It is probably impractical to separate investment banking from commercial banking as the US did with the Glass-Steagall Act of 1933. But there has to be an internal firewall that separates proprietary trading from commercial banking. Proprietary trading ought to be financed out of a bank’s own capital.’


“Conservatives — most of whom hate Soros and his ideas — will rankle at a passage immediately following this: ‘They [financial regulators] must regulate the compensation packages of proprietary traders so that the risks and rewards are properly aligned. This may push proprietary trading out of banks into hedge funds. That is where it properly belongs. Hedge funds and other large investors must also be closely monitored to ensure that they do not build up dangerous imbalances.’


“On Page 55, Soros again addresses Glass-Steagall, which I — along with many respected economists — believe was instrumental in preventing bubbles from turning into meltdowns like that of 2008. I don’t see any reason why the Gramm-Leach-Bliley legislation that replaced Glass-Steagall can’t be modified to separate commercial and investment banks. Soros says on that page, ‘…there have to be internal compartments that separate proprietary trading from commercial banking and seal off trading in various markets to reduce contagion.’ Yes, but the best way to do this, in my opinion, and especially of those of many economists, is to separate commercial and investment banking — as Glass-Steagall specifically and almost always effectively did.”

 

Concluding my 20th plea for the return of Glass-Steagall, I’ll again quote Reich:

 

“And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.

“In light of all this, Jamie Dimon’s promise that J.P. Morgan will ‘fix it and move on’ is not reassuring.

“The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?

“Several weeks ago there were rumors about a London-based Morgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it then, Dimon called it ‘a complete tempest in a teapot.’ Using the same argument he has used to fend off regulation of derivatives, he told investors that ‘every bank has a major portfolio’ and ‘in those portfolios you make investments that you think are wise to offset your exposures’.”

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