Posted on 08/09/2012 10:08:30 PM PDT by starman1356
I'm arguing with a hardcore liberal socialist who blames free-market capitalism for the current economic crisis (and apparently the Great Depression). We've been arguing about this for a while now, well about 30 minutes ago he mentioned a bill that FDR passed called the "Glass–Steagall Act," which he hails as "the reason there were no busts in the 1940s, 1950s, and 1960s," which is a faulty argument in it's own right, given how last month I called him out on his claim about his so-called "1950s prosperity due to high taxes." Sorry for getting a bit off-topic there, but I am ashamed to say that I haven't done much (any) research on the Glass–Steagall Act or the FDIC and I'm currently suffering from sleep deprivation, so please, would someone be so kind as to outline the key points of the "Glass-Steagall Act" for me? I'm currently doing my own research on the subject, but in the meantime, could someone please point me in the right direction here? Much appreciated!
For reference, this is a small portion of the essay he sent me, I've already countered and disproved the rest of his essay, but I do not know enough about the "Glass Steagall Act" to argue against it at this time. -----HIS MESSAGE----- Instead, doesn’t it sound much more likely that a lack of banking regulation caused this recession AND the great depression, considering the fact that banks are what lead to the economic collapses? Uncontrolled Wall Street trading caused the great depression because the financial institutions were unregulated, and millions lost their investments in banks because we had no FDIC to insure those investments. After the great depression, we passed a law called Glass-Steagall that regulated banks. Under it, we had no major recessions. We won WWII, beat the soviets, built the interstate highway system, put a man on the moon, and had the highest median-income growth in the history of the world.
So, after accomplishing all of this, what did we decide to do? We repealed Glass-Steagall. Banks merged and grew to be “too big to fail”, gambled heavily and it took less than a decade for banks to destroy our economy again. So go ahead and blame a law that operated perfectly fine for 25+ years. The reason the housing market collapsed was because of the way the banks bundled and traded sub-prime mortgages, not the fact that the loans were made to begin with. But nice try.
Section 16, codified as paragraph seventh of section 24 of the National Bank Act, applied solely to national banks and Federal Reserve System members. It said two things: One, such banks could invest only in debt securities (no equities)-and only in such securities that were authorized by the Comptroller of the Currency, which is the supervisor of national banks. Securities authorized by the Comptroller were defined as "investment securities", and in practice the Comptroller restricted such securities to investment grade securities. Two, no such bank (national bank or Federal Reserve member bank) could (except for investment securities as defined above) deal in securities or stock for its own account, but could do so solely upon the order of and for the account of customers.
Section 20 said that no member bank of the Federal Reserve System (which includes all national banks) could affiliate in any way with a firm engaged in securities underwriting.
Section 21 applies to any institution that accepts "deposits". It prohibits any such institution from underwriting securities. [Section 21 has not been repealed. Bank holding companies underwrite through non-bank affiliates.]
Section 32 prohibited interlocking directorships between member banks and underwriters.
Sad funny, not ha-ha funny.
Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?"
http://www.econtalk.org/archives/2012/07/zingales_on_cap.html
[Economist and host Russ Roberts (George Mason University) interviews economist Louis Zingales (University of Chicago) about the difference between “Capitalism” and “Crony Capitalism.” During the interview, they discuss the Glass-Steagall Act]:
“RUSS: But I want to start with a very interesting point you make about the repeal of Glass-Steagall. Now, a lot of people blame the crisis on the repeal of Glass-Steagall and the Gramm-Leach-Bliley Act, accomplished that in 1999. It was a Democratic president who signed that but I think it was a Republican Congress that pushed it; but it was a bipartisan bill. It got a lot of support from both sides of the aisle. And you make the argument that its direct effect in causing the crisis was very small. So I want you to explain that. And then the more interesting point—but you still point out the political implications of that were not small. That’s fascinating. So, talk about those two things. First, why it had little direct impact but its political impact was not trivial.
GUEST: So, just to make sure that everybody is on board, I think that what Glass-Steagall used to do is to separate commercial banks from investment banks. And during the crisis, the banks that were most exposed and suffered the most and some of them failed to be bailed out were pure investment banks that would have existed even before the repeal of Glass-Steagall and would have got in trouble even before the repeal of Glass-Steagall. And in fact, one of the solutions or partial solutions to this crisis was to have some rescues, so you had J.P. Morgan buying Bear Stearns, and you had Bank of America buying Merrill Lynch, and this was made possible by the repeal of Glass-Steagall. Because during Glass-Steagall JPMorgan could not have bought Bear Stearns and Bank of America could not have bought Merrill Lynch. The only sort of bad example in this picture was Citigroup. Citigroup was both an investment bank and a commercial bank, and it was highly exposed and was really saved by the government because otherwise it would have gone bust. And by the way, during the crisis, the way you got some confidence back for banks like Morgan Stanley and Goldman Sachs was for them to file as commercial banks. So, I think there is no question; in my view, the separation of investment banking and commercial banking was not the [?] factor in causing the crisis or precipitating the crisis.
RUSS: Did you mean to say that without Glass-Steagall, that if Glass-Steagall were still in place, that JPMorgan could not have purchased Bear Stearns?
GUEST: Yeah. It could not. Because it was an investment bank.
RUSS: Aren’t they both investment banks?
GUEST: JPMorgan is a commercial bank. JPMorgan Chase is actually both, a huge commercial franchise.
RUSS: Okay. I get the point, then. The argument for Glass-Steagall of course is that commercial banks are FDIC insured, and the story is that if you merged them the money would somehow get mixed together and that made the investment banks that had commercial arms or vice versa too big to fail. But the truth is, the investment banks were viewed as implicitly insured anyway. So, it’s in a way it does seem to be not a very important piece of legislation, the repeal of it.
GUEST: In addition, the investment banks were heavily exposed to commercial banks through sort of a lot of loans. If an investment bank had failed, probably would have brought down the commercial banks that guaranteed the credit. So, the separation itself I don’t think is the most effective way to limit risk.
RUSS: And you are also suggesting it’s a red herring when we think about what caused the crisis itself.”
[You might mention to your debating opponent that the entities most responsible for the crisis were mortgage institutions like IndyMac Bank, Countrywide Financial Corporation, and Fannie Mae / Freddie Mac — institutions that had nothing to do with Glass-Steagall, and which would have failed whether or not Glass-Steagall were in place. See this article:
http://seekingalpha.com/article/603831-glass-steagall-act-repeal-did-not-cause-the-great-recession
I recommend the EconTalk series of podcast interviews. They’re always interesting, and the information on them is often useful in one’s discussions and debates with others.]
A great book exposing the fraudulent premises of G-S is Eugene NWhite, “Regulation and Reform of Am Banking”. He shows that in the late 20s the banks that had brokerage houses or “securities affiliates” we’re MORE stable and LESS likely to fail (because their risk was diversified) than those which did not have these attachments.
Pinging starman1356 to your reply.
FYI, an absolute genius and smartest guy I know in banking/finance is Charles Calomiris of Columbia. Google his work.
Snip...
Blame Fannie Mae and Congress For the Credit Mess September 23, 2008
Charlie has paragraphs where he summarizes in English. But he’s one of these guys who really likes to explain via a “story” about markets. I’ll ask him a simple question on the phone and it takes him 10 minutes to give me an answer, but he will give me an answer. He has testified before Congress on many occasions, been asked by both Bushes to be in the Treasury or Council of Economic Advisers and declined.
I am always amazed that many in government have the right answers, but am not surprised that we instead choose the wrong ones to put into law.
The reality is...you live for generations in a qausi-permanent “bust” as they did in Soviet Russia and Mao’s China for generations.
Or you can cycle through prosperity and bust...where the busts clean out the inevitable deadwood that lets new business open and prosper.
We are presently stuck because business in the USA figured out how to “buy” Congressional intervention to prolong their inevitable “bust “ at the expense of the Federal Treasury.
... to be in the Treasury or Council of Economic Advisers and declined.
Good for him. You never get fleas that way.
His view exactly. Think I’ll give him a call.
He should, IMO, tell them only edits of which he approves.
His best comments might get edited out otherwise.
Glass-Steagall would not have prevented the real estate bubble.
The companies that were at the heart of the real estate lending machine were predominantly not companies that were engaged in both commercial and investment banking. The bulk of the lending was done by companies like Countrywide, Washington Mutual, Indy Mac, Fannie Mae, Freddie Mac, and the dozens of smaller specialized subprime lenders that were neither commercial banks nor investment banks. [Yes, F&F do not lend but they set the underwriting standards and guarantee, thereby effectively lending.]
The smaller mortgage companies sold the loans they made either to F&F or for packaging and sale into the securities markets, as they always had done. Washington Mutual and Indy Mac kept a lot of their production in their own portfolios. The companies that packaged the securities included some commercial bank/investment bank combinations, notably Citigroup. But Goldman Sachs, Bear Stearns, Lehman Brothers and Merrill Lynch, which together accounted for most of the privately issued [non-F&F] packaged loans sold as securities, were not commercial banks at all. European banks that participated, such as Barclay’s, were universal banks before 1999. AIG, which enabled some of the worst securities by writing CDSs, was neither a commercial bank nor an investment bank.
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