What it means to re-reintroduce Glass-Steagall into today’s economy. And other thoughts.
Yes, we’re talking about the Glass-Steagall Act. A law that was passed in 1933, after the Great Depression, which separated commercial banks from trading securities and then was repealed in 1999 during the Clinton Administration with the Gramm-Leach-Bliley Act. While it would be disingenuous to say that all of Glass-Steagall’s elements were completely wiped-out from current government oversight – many of its ideas were present in 2009’s Volcker Rule within the Dodd-Frank bill – it’s safe to say that financial oversight has drastically changed since Glass-Steagall’s repeal.
Two US senators want to bring that level of financial oversight back.
Senators Elizabeth Warren and John McCain are currently introducing legislation that would make major banks split their trading security firms and commercial banks once again. Basically both of them want to reintroduce Glass-Steagall back into the system. They look to not be alone. Sens. Angus King and Maria Cantwell are also co-signers to the bill.
The core purpose of the bill would be the same as it was with the original Glass-Steagall, that by separating investment banking and commercial banking sectors, investment banking could no longer place risky bets using money from checking and savings accounts. So if an investment firm were to make a bad investment and lose huge amounts of money, commercial banking (ie savings and checking accounts) wouldn’t be affected.
Now if you’re asking yourself whether the inclusion of Glass-Steagall played a part in the financial crisis of 2008, the popular opinion among economists is that it absolutely did. Because while an argument can be made that the 2008 financial crisis would have happened with or without Glass-Steagall in place, it’s hard to argue the severity of which the crisis affected the country.
Then again, there are people out there that believe reinstating Glass-Steagall back into the financial system would do nothing – if not hurt – its growth.
Critics of Glass-Steagall are quick to point out that the financial institutions in question that caused the 2008 crisis – Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and Fannie Mae and Freddie Mac – wouldn’t be under the regulation of Glass-Steagall. They argue all Glass-Steagall would do is bind the financial system in reaching its full potential. They feel it’s as arcane as someone reinstating prohibition to cut down on drunk driving.
In reality the new Glass-Steagall will be an interesting talking point for many politicians on a theoretical level. Similar to what happened last year. As for the legislation actually moving through Congress,
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