Support builds for second-coming of Glass-Steagall

Sometimes, a 1933-vintage idea survives the test of time.

When things started to go very badly for the financial services industry in September 2008, I mused about the role that the Clinton Administration’s decision to repeal the post-Depression Glass-Steagall Act had in the downfall of the U.S. banking system (see prior post “Will we ever see a Glass-Steagall redux?” Sept 15-08). If U.S. banks hadn’t been allowed to acquire investment banks and get into the game of building on and off balance sheet SIVs, the mayhem would have largely been contained to the Broker/Dealers. I also wondered if there would be pressure to bring back Glass-Steagall. While it made sense to me at the time, I didn’t think the disaster on Wall Street would ever get that bad. And then we almost went into a Depression, before the mark-to-market rules were essentially suspended and stocks rallied something like 65%.

Well, the Glass-Steagall redux talk has begun, and Thomas Frank is on the job. And in the pages of the Republican-friendly Wall Street Journal:

Today, as we begin to debate Glass-Steagall all over again, the old stereotypes are simply being pulled out of deep-freeze. The futility of efforts to “turn back the clock” are noted. A clever put-down from an anonymous Treasury official is much repeated: it “would be like going back to the Walkman.”

The old law’s revival is said to be a way of pandering to the low emotions of the public, as opposed to its higher faculties of reason. A Business Week story on the subject understands the Cantwell-McCain proposal as a way of “soothing public anger over bailouts and bonuses.” Politico’s account of the measure chalks the whole thing up to “populist angst,” whatever that is.

What no one has yet grasped is that pooh-poohing Glass-Steagall in this way is about as sound a move as was slapping down your savings on shares of TheGlobe.com.

One of these days, we will finally dispel the “New Economy” mysticism that beclouds this issue and begin to think seriously about how to re-regulate the financial sector. And when we do, we may find that the answer involves some version of the idea behind Glass-Steagall—drawing a line between banks that the government effectively guarantees and banks that behave like big hedge funds, experimenting with the latest financial toxins. Hopefully, that day will come before Wall Street decides to take another headlong run at some attractive cliff.

I second that motion.

MRM

Here’s the link to the repost on Seeking Alpha