Why I was won over by Glass-Steagall

Discussion in 'Politics' started by hvactec, Jun 23, 2012.

  1. hvactec
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    hvactec VIP Member

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    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 stabilise 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.

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    There are certainly better ways to deal with excessive risk-taking behaviour 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.

    The Volcker rule, which prohibits banks from engaging in proprietary trading but allows them to put their principal at risk, is not a good substitute. Proprietary trading is when a bank invests in stock hoping that its price will go up. A bank engages in principal trading when it buys a stock from a client as a service to that client, who wants to unload his position quickly. The difference is therefore one only of intentions, which are impossible to detect, since any transaction involves two consenting parties.

    read more Why I was won over by Glass-Steagall - FT.com
     
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    Last edited: Jun 23, 2012
  2. B. Kidd
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    Even Jamie Dimon, CEO of JPMorgan-Chase, considered by most in the financial sector to be the smartest banking CEO, hasn't even figured the OP out yet!
     
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