Thursday, November 12, 2009

The Ghost of Glass-Steagall

10 years ago today, amid a flurry of de-regulation of the financial system, a bill repealing, Glass-Steagall, the depression-era bill that kept banks from growing too-big-to-fail was signed into law by President Clinton.  Earlier this week, a decade and a depression-scale disaster later, Senator Dodd released a discussion draft of his proposal to reregulate the financial sector.  To paint the scene of 10 years ago I turn to blogger Kevin Connor: who uncovered an amazing article in American Banker from 1999.

To mark the historic occasion, House Banking Committee Chairman Jim Leach played host to a group of his closest collaborators on the bill, including Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Lawrence H. Summers, . . . They joined staff members, lobbyists, and reporters in drinking champagne and devouring a large cake, which bore an epitaph for the Depression-era separation of commercial and investment banking that the bill undoes. It read: ” Glass-Steagall, R.I.P., 1933-1999.”

Many of the same people who are now creating proposals to reign in the financial industry were, 10 short years ago, the people eating cake as they destroyed the barn door of regulation and let the financial sector run free.  So it is critical that we take a close look at what is being proposed. The Dodd plan joins proposals from Rep. Barney Frank, Senator Sanders and the White House.  Now that all of the pieces are on the board, lets play our game.

Points are scored by the Dodd, Frank, and White House proposals for focusing on both creating a consumer protection agency to blow the whistle on banks who try to trick consumers, and for bringing previously unregulated activities into a regulatory framework.   As for too-big-to-fail? The plans all give more power to various existing and new agencies to ramp up regulation with the size of giant financial firms.

The only proposal that actually calls for breaking up the big banks is the Sanders one.  Short on specifics, the Sanders proposal directs the treasury secretary to identify who is too-big-to-fail within 90 days, and break them up within a year.  Cool.

There are valuable ideas in these proposals, but what they all seek to do is address the symptoms of a larger problem.  Regulating derivatives, creating ‘moral hazard’ for failing big banks, protecting consumers from predatory practices, and making the industry more transparent are all worthwhile and needed reforms.  And none of them will prevent the kind of abuses that destroyed our economy from happening again.

With the exception of the Sanders proposal, we are talking about addressing symptoms of the problem and not the cause.  The sheer size and power of the big dogs will make any reform that doesn’t cut them down to size hollow.  They will wait until no one is looking, buy enough members of congress (and a big enough cake) and again crash through barn door and get fat grazing on the pastures of the American people.

Join the effort to break up the big banks today.  This is only going to happen if we all get serious.  Send your friends to and sign up to take back our economy.

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