JON SCHAFF: Glass-Steagall Act should be reinstated now
This past legislative session, the South Dakota Legislature passed a resolution calling for the reinstatement of the Glass-Steagall Act by the United State Congress. More recently, a bi-partisan group of state legislators sent a letter to Sen. Tim Johnson, who chairs the Senate Banking Committee, reiterating the call for the return of Glass-Steagall.
What is Glass-Steagall? Passed during the Great Depression, the Glass-Steagall Act separated commercial banking from investment banking. So, financial enterprises had to make a choice: Either be a commercial bank and engage in lower-risk activity, or be an investment bank and engage in higher-risk, and higher-reward, behavior.
The reason for this separation is simple. In the wake of the bank collapses of the Great Depression, the government wanted to shield regular folks from being ruined by risky bank behavior. People put money in local banks to save it, and those savings should not be jeopardized by high-risk investments. But people contribute to investment banks precisely to make, not save, money. Thus we allow more risk. Also, commercial bank accounts are protected by deposit insurance, while deposits with investment accounts are not.
In 1999, a coalition of Bill Clinton, then-Treasury Secretary Robert Rubin and congressional Republicans repealed the regulation. In that era of strong economic growth, the feeling was the markets could regulate themselves, and the feared "business cycle" had been defeated. Economic growth was here to stay.
Also, major lobbying by Travelers Group and Citibank influenced policy makers. After the bill passed, those two institutions were allowed to merge, which would have been illegal under Glass-Steagall. Not coincidentally, Rubin then left the Treasury for a job with the renamed Citigroup, making over $100 million while the bank collapsed.
Of course, events of 2008 proved wrong the notion of continuous economic growth. A combination of greed, poor regulation and foolish public policy created a near-nightmare that required the bailing out of many financial institutions by taxpayers.
That bailout was necessary, as the collapse of major financial institutions would have brought worse consequences than the bailout; but many rightly question whether we should allow banks to get "too big to fail."
If we don't like bailing out banks, then we can't let banks get so large. Presently, five banks hold "assets equal to 56 percent of the country's economy" according to David Rohde. One way to reduce the risk to the public is to separate commercial and investment banking.
Some, including Sen. Johnson, believe the Dodd-Frank banking reform bill passed in 2009 is enough regulation. This complicated morass of regulatory confusion accomplishes precisely what it was intended to do. Sponsored by two members of Congress, Chris Dodd and Barney Frank -- deeply involved in banking corruption -- Dodd-Frank favors big banks at the expense of smaller banks who find compliance with byzantine rules difficult and expensive. It also keeps in place "too big to fail." There is an implicit guarantee that if large banks start to go under, the taxpayer will bail them out.
Those interested in both economic justice and sound policy should stand with the South Dakota Legislature and favor a reinstatement of the Glass-Steagall Act.