This is an article that I wrote prior to President Obama winning the Presidency (circa 2009) and I am posting it again because of popular outcry. There is a push for bringing back Glass-Steagall. Congress has put forth legislation that has time and again fallen short of the protections that this legislation enacted back in 1933 produced. For example, the premises of Glass-Steagall would serve us better than GBLA or SOX ever could. Read on!
The New York Times reported in 2009 (Louis Lichitelle, 2009) that Paul Volker, former Chairman of the Federal Reserve [1979-1987], had advised the Obama Administration to bring back the 1933 Glass-Steagall Act [SGA]. The Glass-Steagall Act was repealed in 1999 and replaced with the Gramm-Leach-Bliley Act [GLBA]. The GLBA removed restrictions on commercial banks and investment banks allowing them gross latitude in activities and services. (Reem Heakel, 2009)
Candidate Obama into President Obama asked time and again for advice on, and help with, the economic meltdown he inherited. His advice came from many sources including Paul Volker, Tim Geithner, Larry Summers, Ben Bernanke, and Warren Buffett. Thus far advice and measures implemented has not yielded any one best plan for recovering our failing economy.
Could the health of our economy depend on this one act as Paul Volker suggested? I say yes! According to those inside the Obama Administration this is not the direction they will most likely move, but perhaps they should. In fact there are striking similarities between the Depression, in economic terms, and our current economic situation. Both meltdowns were due to lax regulations and greedy bankers, insurers, or investment advisors.
The best decisions come from knowledge and complete understanding of the problem or situation. In today’s complex business environment we also have to consider the bigger picture and impact our decisions may have on the world economies. Therefore, before you, or they, make an informed decision let’s take a look at what the Glass-Steagall Act is and what protections or remedies it provides.
According to www.investopedia.com the GSA set up restrictions and conditions whereby banks, insurers, and investment firms could conduct business. Banks were given a one year timetable where they had to make a decision as to whether to specialize in loans, investments, or insurance. Once the decision was made commercial banks could only use 10% of their income to invest in securities with the one exception being investing into government issued bonds. This was meant to stop banks from using deposits for investment in risky, questionably yielding instruments, in the secondary markets. What had been the practice was-the banks would gamble, lose and then get reimbursed by the FDIC up to the legally allowable limits, which were $100,000 and are now $250,000. This is a questionable practice in and of itself and one that we need to severely limit or curtail because it will continue to come back and bite us. Restating the GSA would serve that purpose perfectly.
Naturally Wall Streeters hated the GSA because it limited their activities and forced them to be accountable. In retrospect we can see that retracting that important bill had dire affects on our entire market and in turn the world markets. The laws of physics teach us that “what goes up must come down.” Our markets, round the world, rose to unprecedented limits because investment in risky and unsecured debt instruments by banks, investment houses, and insurance companies were paving the way for record profits. Even in 2005 when the housing markets bubble began to lose air nobody spoke up. Why not? How can any economist worth their salt not know that this volatile situation was never going to last?
Alan Greenspan sat idly by saying that the housing dip was nothing more than just a blip. Again banks, insurance companies, and investment houses were allowed to operate in whatever capacity they deemed able to permit the greatest profit regardless of how detrimental it might be to the remainder of our world economies in terms of unsecured risk. Credit Default Swaps became the new “junk bonds” and Wall Street was infected with investing in them. Banks, insurers, and investment firms became too “big to fail”. Get real. There should be no business too big to fail if one wants to adhere to a capitalistic society. If we had the proper stops in place with the rules, regulations, and oversight provided by GSA this economic debacle would never have transpired.
The question is: can we, or have we, learned anything from our previous mistakes? If so, how can we continue to operate in this infected and sick environment where banks, investment firms, and insurers can do just about anything they want with our taxpayer/investor dollars? Was not their unfettered greed the main ingredient to this fateful economic wasteland recipe? On top of our billions of dollars spent to stabilize them, when they rightly deserved punishment instead, we continue to allow outrageous executive pay and outlandish bonuses when the vast majority of Americans are suffering while the Wall Street thugs are living the high life. So we punish Americans to prop up the thieves? I say enough is enough! The only way to bring some equilibrium back to our marketplace is to reinstate the GSA.
The GSA would also serve to sever or separate those businesses that have merged in the wake of this mess because it prohibits one firm from being “too large to fail.” The onus would be placed squarely back on the businesses to decide how they want to operate and then to operate efficiently and honestly within those confines. Please write or call your legislators telling them to reinstate the GSA to prevent another economic meltdown that may be even larger and harder to rein in than this one is/was. The time to act is NOW!
Lichitelle, Louis. 10/20/09. Volker fails to sell a bank strategy. New York Times. Business section.
Heakal, Reem. What was the Glass-Steagall Act?. Posted on www.investopedia.com