Glass-Steagall: Can it rise from the dead?
What could be more boring than a newspaper column about banking regulations? But wait! What if your family were crushed by the Great Depression of the 1930s? Or, more recently, devastated by the economic collapse of 2008-09? Then, you might be interested in the history of the Glass-Steagall Act of 1933.
Prior to Glass-Steagall, commercial savings banks and insurance companies could take savings from depositors and invest those savings in the over-inflated stock market of the late 1920s. When the stock market crashed in October, 1929, the hard-earned savings of millions were wiped out as were the many commercial savings banks and the insurance companies who put the savings of millions of Americans at greedy risk.
President Roosevelt, to his credit, signed Glass-Steagall which divided banking into two categories: commercial banks that made loans to individuals and businesses and investment banks that were allowed to underwrite and trade complex financial instruments (read: higher risk stocks and bonds). From 1933 to 1999, Glass-Steagall was instrumental in averting further stock market crashes and economic busts.
But all that changed in 1999 when Democrat President Bill Clinton, with the help of a GOP-controlled Congress, repealed Glass-Steagall. That coupled with the Clinton Administrations demand that banks confer home mortgages on unfortunates who could not even pay their telephone bills, led to the sub-prime mortgage crisis of 2008-09
In 1999, the effort to repeal Glass-Steagall was led by Republican U.S. Senator Phil Gramm who, after retiring in 2002, got a job with UBS-AG, a Swiss bank that converted from commercial banking into investment banking and then lost tons of money in the 2008 debacle. Citigroup lost $27.7 billion in 2008. AIG Insurance lost billions. Both Citigroup and AIG and other investment groups were bailed out by you and me.
Now, President Trump wants to restore Glass-Steagall and erect a "wall" between commercial savings banks and the risk-taking investment banks. Surprisingly, President Trump has the support of Treasury Secretary, Steven Mnuchin, and National Economic Council Director, Gary Cohn, both of whom are former bankers from Goldman Sachs Group, Inc., one of the leading investment-banking houses.
Even so, what are the chances that President Trump, Mnuchin, and Cohn can get the GOP-controlled Congress to reinstate a "21st Century" form of Glass-Steagall? Just like the opposition to the repeal of ObamaCare by the American Medical Association, AARP, and the major hospital chains (follow the money trail), it is likely that Wall Street, which actually prefers Democratic Administrations to Republican, will find a way to route millions of campaign contributions to members of the House of Representatives in return for the continued entombment of Glass-Steagall.
Meanwhile, the convoluted post-2009 crash regulations of Dodd-Frank make it very difficult for commercial banks to underwrite mortgages and small business loans. After all, why would Wall Street mess around with small loans to individuals and small businesses when it is so much easier to make big money in todays stock market?
If readers find it difficult to obtain a home mortgage or a small business loan in a timely fashion, this look back at the demise of Glass-Steagall may offer the small comfort of better understanding: however, comfort is a poor substitute for actual reform of Americas banking regulations and the resurrection of Glass-Steagall.
Nationally syndicated columnist, William Hamilton, is a laureate of the Oklahoma Journalism Hall of Fame, the Nebraska Aviation Hall of Fame, the Colorado Aviation Hall of Fame, the Oklahoma University Army ROTC Wall of Fame, and is a recipient of the University of Nebraska 2015 Alumni Achievement Award. He was educated at the University of Oklahoma, the George Washington University, the U.S Naval War College, the University of Nebraska, and Harvard University. For more, see: www.central-view.com.
©2017. William Hamilton.
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