Weissman
Thursday marks the 10-year anniversary of the passage of the repeal of the 1933 Glass-Steagall Act and related legislation. It is an anniversary worth noting for what it teaches us about forestalling financial crises, the consequences of maniacal deregulation and the out-of-control political power of the mega-financial institutions.
What lessons should be learned from the 10-year debacle?
First, Glass-Steagall’s key insight was in the need to treat regulation from an industry structure point of view. Glass-Steagall’s authors did not set out to establish a regulatory system to oversee companies that combined commercial banking and investment banking. They simply banned the combination of these enterprises. Cleaning up the current mess, we need strategies that focus on industry structure, as well as more traditional regulation.
Second, we need to return to Glass-Steagall’s more particular understanding: Depository institutions backed by federal insurance protection cannot be involved in the risky, speculative betting of the investment banking world. We need not just to reinstate Glass-Steagall, but to infuse its underlying principles throughout the financial regulatory scheme. Commercial banks should not be in the business of speculation. They have a job to do in providing credit to the real economy. They should do that. Their job is not to engage in betting on derivatives and other exotic financial instruments.
Third, giant financial institutions exercise too much political power, and for that reason alone must be broken up.
Fourth, we need broad reform in the area of money and politics. We need public financing of congressional elections, even stronger lobbyist reforms and tight restrictions to close the revolving door through which individuals spin as they travel between positions in government and industry.
Robert Weissman is president of Public Citizen.
Lehman and Bear Stearns were the two major failures that froze the credit markets and they were both stand-alone investment banks, not combos.
If the other banks weren’t in trouble, why did they take taxpayers’ TARP bailout funds? Investment banking risks (and rewards) should not be underwritten, guaranteed or paid for by taxpayers–period.
Lehman and Bear Stearns are just the stand-alone investment banks that the government let fail. They are not the only ones who were at risk of failing.
I agree 100% with all of the points in the original article and would add that the only thing Glass Seagall failed to do was make sure that we also regulated the public accounting industry. We should especially hold them accountable for their failed audits of banks and other financial institutions that the American public is paying to bail out.
Ciao for Now,
Sara McIntosh
Sorry about the typo on Glass-Steagall . . .
Other banks were facing billion dollar losses but Lehman & Bear were responsible for the complete freeze in the credit markets. The govt stepped in to save Bear by forcing a sale to JPMorgan for $2/share, but let Lehman fail.
Companies like Goldman Sachs and JPMorgan didn’t want TARP money but it was forced on them by Treasury Sec. Hank Paulson to avoid giving the other institutions a “stigma” of receiving bailout money.
The banking industry needs regulation watch dogs but the more power the federal govt gets over banks the more it becomes a “wolves watching the hen-house” situation.
What needs regulation is the CDS market and financial terrorists at hedge funds like George Soros’s & John Paulson’s.