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  • Politico Perpetuates Glass-Steagall Myth

    Politico‘s Ryan Grim says he used to work for the Marijuana Policy Project. He really should lay off the mind altering substances before he attempts to write about financial topics ever again.

    Grim has an article out today titled “Lawmakers regret deregulating” but the only deregulation Grim cites is “repealing the Glass-Steagall Act.” The Glass-Steagall Act did many things, including founding the Federal Deposit Insurance Company (FDIC). But the FDIC is still around today, so clearly the entirety of Glass-Steagall has not been repealed. Grim does mention a 1999 vote in Congress, so despite the fact that he never reports this, the deregulation he  probably is referring to is the Gramm-Leach-Bliley Act. What did that Act do? Don’t turn to Grim for answers. His article never attempts to explain what specific deregulation caused the current crisis. He never bothers to report what exactly Gramm-Leach-Bliley did. Instead we get this rambling from Rep. John Dingell (D-MI):

    [W]hat we are creating now is a group of institutions which are too big to fail. … Not only are they going to be big banks, but they are going to be big everything, because they are going to be in securities and insurance, in issuance of stocks and bonds and underwriting, and they are also going to be in banks.

    And under this legislation, the whole of the regulatory structure is so obfuscated and so confused that liability in one area is going to fall over into liability in the next. Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events.

    Grim then asserts: “Now that those events have come to pass…” Grim needs to study up. As we explained before:

    First of all, Gramm-Leach-Bliley is hardly the momentous event the left makes it out to be. The 1933 Glass-Steagal Act that prohibited commercial banks from owning investment banks, and vice versa, had been steadily weakened since the 70s by an increasingly diverse and complex new financial reality. Waivers from regulators for merger became routine and the 1998 merger between Travelers and Citigroup functionally repealed the law. Gramm-Leach-Bliley only put a de jure stamp of approval on a de facto regulatory framework.

    Second, the left has simply offered no explanation as to how the merging of commercial and investment banks caused the current crisis. In fact, the evidence so far shows that Gramm-Leach-Bliley has helped soften the blow to taxpayers by allowing commercial banks to take over trouble investment firms.

    Remember, Glass-Steagall was passed to protect commercial banks from failure by forbidding them from investment bank practices like trading in securities and underwriting stocks and bonds. [None of the recent] failed institutions are commercial banks that got in trouble through risky investment banking. Instead, it is the commercial banks that are providing some stability to the system by purchasing troubled investment banks. Without Gramm-Leach-Bliley they would not even be allowed to technically do this.

    Posted in Economics [slideshow_deploy]

    2 Responses to Politico Perpetuates Glass-Steagall Myth

    1. lance d logue panam says:

      The claim "Gramm-Leach-Bliley only put a de jure stamp of approval on a de facto regulatory framework.", begs the question, 'was it wise?'. The justification that it allowed a most unsatisfactory outcome is ridiculous, and disingenuous.

      This is the kind of spin you get from an ideologue, working for the Chamber of Commerce, or any one of the many partisan think tanks. "Without Gramm-Leach-Bliley they would not even be allowed to technically do this." We would not need to, commercial banking would be safe, while the fate of investment banks, and AIG could be debated. That "de jure stamp of approval" contaminated commercial banking with investment banking risk taking, which is threatening our entire banking system. Similar deregulation in 1982 allowed S & L's to directly invest in realestate. Government insured deposits appear to have given 'universal' combination banks the competitive advantage, but at the cost of deposit security, investor confidence, and for some, survival. This regulatory backslide created, 'too big to fail'. This is why we must intervene somehow. You would think conservatives preferred cautious pragmatic policies, but instead they chose an ideological extreme which caused our bailout of desperation.

    2. Kristina, Gloucester says:

      As a response to Mr. Logue of Panama City – There are segments of commercial banking is safe that is why it has to ability to now buy up some of these "risky" investments. Those who have played it smart, or have taken the risk, and had the wisdom to get out at the right time now have the capital to be able to infuse the situation. Gramm-Leach-Bliley did not cause the troubles in the market and his arguments do not prove cause, nor do they bring up solutions as to what really was the cause. "Contaminated commercial banking with investment risktaking" – which is pretty much what any business does – take risks, most minor, some major, but they are always there. It is foolish to think that government can regulate away all risk – especially if they don't give the freedom of these businesses to search avenues to diversify wisely. When you have the ability to diversify, you also have the ability to fix a process that had broken down. Taking away the ability for someone to make a risky investment doesn't solve the problem of why the investment was risky in the first place. Too often we blame the wrong person, regulate a process that wasn't broken and never fix the process that is broken – only to make things worse in the long run. The fact is, the financial markets took a chance on a risky consumer.

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