Conservative Economist Endorses Glass-Steagall

Discussion in 'Economy' started by Star, Jun 12, 2012.

  1. Star
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    Star Gold Member

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    Economist's View: Why Zingales Now Endorses Glass-Steagall


    Luigi Zingales has changed his mind about Glass-Steagall:
    Sunday, June 10, 2012
    Why I was won over by Glass-Steagall, by Luigi Zingales, Commentary, FT: I have to admit that I was not a big fan of the forced separation between investment banking and commercial banking along the lines of the Glass-Steagall Act in the US. I do not like restrictions to contractual freedom, unless I see a compelling argument that the free market gets it wrong. Nor did I buy the argument that the removal of Glass-Steagall contributed to the 2008 financial crisis. The banks that were at the forefront of the crisis – Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide – were either pure investment banks or pure commercial banks. The ability to merge the two types was crucial in mounting swift rescues to stabilize the system – such as the acquisition of Bear Stearns by JP Morgan and of Merrill Lynch by Bank of America.
    Over the last couple of years, however, I have revised my views and I have become convinced of the case for a mandatory separation.
    There are certainly better ways to deal with excessive risk-taking behavior by banks, but we must not allow the perfect to become the enemy of the good. In the absence of these better mechanisms, it makes perfect economic sense to restrict commercial banks’ investments in very risky activities, because their deposits are insured. Short of removing that insurance – and I doubt commercial banks are ready for that – restricting the set of activities they undertake is the simplest way to cope with the burden that banks can impose on taxpayers. ...
    I was initially swayed by Dean Baker's argument that the banks that caused the most trouble were "either pure investment banks or pure commercial banks" as noted above, and thus that reestablishing a forced separation between the two types of institutions would not do much to insulate us from crises in the future. By my view on this has also evolved along the same lines, e.g. that "With the repeal of Glass-Steagall, investment banks exploded in size and so did their market power" leading to "an opaque over-the-counter market populated by a few powerful dealers," that "The separation between investment and commercial banking also helps make the financial system more resilient," and that, importantly, "Glass-Steagall helped restrain the political power of banks." This should not be the only thing we do to try to make the financial system more stable, there is much,much more that needs to be done. But it is an important part of the effort. (One more note on this -- I also think that there were additional vulnerabilities created by the removal of Glass Steagall. Even if those additional vulnerabilities didn't cause trouble this time around, that doesn't mean they never can. Re-imposing the separation between investment banking and commercial banking eliminates some of these potential problems.)
     
  2. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    I agree. Like to hear the argument for the other side though.
     
  3. Euroconservativ
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    I know some Austrian School economists that endorse Glass-Steagall. For example, Huerta de Soto.
     
  4. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Anybody know the opposing view against G/S? Seems to make perfect sense to me to keep the risk-taking investment side separate. I think having bigger and fewer banks is the wrong direction to go.
     
  5. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    Clinton's view was and still is that they needed to be combined to be big and competitive and efficient.

    Deposits were insured and even after Glass they were not allowed to speculate with depositors money



    Best argument to prevent combinations is that it prevents being too big to fail.
     
  6. Rshermr
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    Rshermr VIP Member

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    Ed, profound again,

    Clinton went along with several repub politicians that wanted to eliminate Glass Steagall. Not sure of his reasoning, but he was pressured and perhaps sold by Greenspan, and in 1999, the Gramm–Leach–Bliley Act was passed.

    Not allowed to speculate with depositors money? If only. Did you ever hear of mortgage backed securities sold by all types of financial institutions. Same with Derivatives, and a number of other risky instruments. Therein lay the problem, and the problems to come.

    Too big to fail is a big issue. But the real issue, and the one that Glass Steagle guarded against was risky investments combined with deposits.
     
  7. Star
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    Easy part of the answer -- The primary reason Clinton went along with the repeal of Glass-Steagall is because, by the time the Financial Services Modernization Act, (AKA Gramm–Leach–Bliley Act) was passed by congress, the Glass-Steagall act had been emasculated to a degree of non-consequence -- check out the step by step assault on, and weakening of the Glass-Steagall act timeline here.

    Repeal of Glass-Steagall is just another case of money talks in Washington DC.




    Oct.-Nov. 1999
    Congress passes Financial Services Modernization Act


    After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

    On Oct. 21, with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill's effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

    On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.
    Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?"
     

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