Today marks the tenth anniversary of the repeal of the 1933 Glass-Steagall Act, which created a legal separation of commercial banks and investment banks. Today on Counterpunch you can find a succinct and well-written article by Robert Weissman, entitled "Maniacal Deregulation," on the repeal of Glass-Steagall. Far from being an arcane matter, Glass-Steagall was a central piece of legislation preventing commercial banks from participating in the kind of high-risk investment that is to blame for the current recession-depression.
Repeal of Glass-Steagall had many important direct effects but the most important was to change the culture of commercial banking to emulate Wall Street's high-risk speculative betting approach."Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively," writes Nobel Prize-winning economist Joseph Stiglitz. "It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people's money -- people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk-taking."Weissman then sets out a set of demands for true reform, which means probably not the kind of reform that we will be told 'is necessary':
- Instead of creating a new regulatory body, banking reform should focus on industry structure, This included reinstating the legal barrier between commercial banks and investment banks, along with stricter regulation.
- Keep commercial banks, backed by the FDIC, from getting involved in speculation.
- Breaking up the giants of the financial industry because they wield too much political power.
- And finally, Weissman says it best: "we need broad reform in the area of money and politics. We need public financing of Congressional regulations, even stronger lobbyist reforms, and tight restrictions to close the revolving door through which individuals spin as they travel between positions in government and industry." This, I think is worth pointing out, probably has to be the basis of other reforms and not the other way around.
1 comment:
I occasionally wish I was more optimistic. However I find myself thinking of the economy in terms of my own profession. In behavior analysis there is a term called "extinction response". This is a sharp spike in behavior that happens when a previously successful behavior no longer works. The spike is even worse when the behavior is intermittently reinforced. Deregulation, and/or inept regulation and oversight made a lot of money for those foxes guarding the hen-house. I cannot help but predict that the next spat of "reform" is going to be a spike, not a change in behavior due to the high level of reinforcement of a select few financial elites who, for some unknown reason, seem to still be in charge.
Post a Comment