Destruction of the New Deal: the elimination of political agency and responsibility for economic performance and outcomes

The statecraft of neoliberalism: the elimination of political agency and responsibility for economic performance and outcomes by Bruce Wilder

Nov 18, 2016 | crookedtimber.org

bruce wilder 11.16.16 at 10:07 pm 30

At the center of Great Depression politics was a political struggle over the distribution of income, a struggle that was only decisively resolved during the War, by the Great Compression. It was at center of farm policy where policymakers struggled to find ways to support farm incomes. It was at the center of industrial relations politics, where rapidly expanding unions were seeking higher industrial wages. It was at the center of banking policy, where predatory financial practices were under attack. It was at the center of efforts to regulate electric utility rates and establish public power projects. And, everywhere, the clear subtext was a struggle between rich and poor, the economic royalists as FDR once called them and everyone else.

FDR, an unmistakeable patrician in manner and pedigree, was leading a not-quite-revolutionary politics, which was nevertheless hostile to and suspicious of business elites, as a source of economic pathology. The New Deal did not seek to overthrow the plutocracy, but it did seek to side-step and disable their dominance.

It seems to me that while neoliberalism on the right was much the same old same old, the neoliberal turn on the left was marked by a measured abandonment of this struggle over the distribution of income between the classes. In the U.S., the Democrats gradually abandoned their populist commitments. In Europe, the labour and socialist parties gradually abandoned class struggle.

In retrospect, though the New Deal did use direct employment as a means of relief to good effect economically and politically, it never undertook anything like a Keynesian stimulus on a Keynesian scale - at least until the War.

Where the New Deal witnessed the institution of an elaborate system of financial repression, accomplished in large part by imposing on the financial sector an explicitly mandated structure, with types of firms and effective limits on firm size and scope, a series of regulatory reforms and financial crises beginning with Carter and Reagan served to wipe this structure away.

When Obama came in, in 2008 amid the unfolding GFC, one of the most remarkable features of his economic team was the extent to which it conceded control of policy entirely to the leading money center banks. Geithner and Bernanke continued in power with Geithner moving from the New York Federal Reserve (where he served as I recall under a Chair from Goldman Sachs) to Treasury in the Obama Administration, but Geithner's Treasury was staffed from Goldman Sachs, JP Morgan Chase and Citibank. The crisis served to concentrate banking assets in the hands of the top five banks, but it seemed also to transfer political power entirely into their hands as well. Simon Johnson called it a coup.

I don't know what considerations guided Obama in choosing the size of the stimulus or its composition (as spending and tax cuts). Larry Summers was identified at the time as a voice of caution, not "gambling", but not much is known about his detailed reasoning in severely trimming Christina Romer's entirely conventional calculations. (One consideration might well have been worldwide resource shortages, which had made themselves felt in 2007-8 as an inflationary spike in commodity prices.) I do not see a case for connecting stimulus size policy to the health care reform. At the time the stimulus was proposed, the Administration had also been considering whether various big banks and other financial institutions should be nationalized, forced to insolvency or otherwise restructured as part of a regulatory reform.

Here's the thing: the globalization and financialization of the economy from roughly 1980 drove both increasingly extreme distribution of income and de-industrialization. Accelerating the financialization of the economy from 1999 on made New York and Washington rich, but the same economic policies and process were devastating the Rust Belt as de-industrialization. They were two aspects of the same complex of economic trends and policies. The rise of China as a manufacturing center was, in critical respects, a financial operation within the context of globalized trade that made investment in new manufacturing plant in China, as part of globalized supply chains and global brand management, (arguably artificially) low-risk and high-profit, while reinvestment in manufacturing in the American mid-west became unattractive, except as a game of extracting tax subsidies or ripping off workers.

It was characteristic of neoliberalism that the policy, policy intention and policy consequences were hidden behind a rhetoric of markets and technological inevitability. Matt Stoller has identified this as the statecraft of neoliberalism: the elimination of political agency and responsibility for economic performance and outcomes. Globalization and financialization were just "forces" that just happened, in a meteorological economics.

It is conceding too many good intentions to the Obama Administration to tie an inadequate stimulus to a Rube Goldberg health care reform as the origin story for the final debacle of Democratic neoliberal politics. There was a delicate balancing act going on, but they were not balancing the recovery of the economy in general so much as they were balancing the recovery from insolvency of a highly inefficient and arguably predatory financial sector, which was also not incidentally financing the institutional core of the Democratic Party and staffing many key positions in the Administration and in the regulatory apparatus.

This was not your grandfather's Democratic Party and it was a Democratic Party that could aid the working class and the Rust Belt only within fairly severe and sometimes sharply conflicting constraints.

No one in the Democratic Party had much institutional incentive to connect the dots, and draw attention to the acute conflicts over the distribution of income and wealth involved in financialization of the economy (including financialization as a driver of health care costs). And, that makes the political problem that much harder, because there are no resources for rhetorical and informational clarity or coherence.

bruce wilder 11.16.16 at 10:33 pm ( 31 )

The short version of my thinking on the Obama stimulus is this: Keynesian stimulus spending is a free lunch; it doesn't really matter what you spend money on up to a very generous point, so it seems ready-made for legislative log-rolling. If Obama could not get a very big stimulus indeed thru a Democratic Congress long out of power, Obama wasn't really trying. And, well-chosen spending on pork barrel projects is popular and gets Congressional critters re-elected. So, again, if the stimulus is small and the Democratic Congress doesn't get re-elected, Obama isn't really trying.

Again, it comes down to: by 2008, the Democratic Party is not a fit vehicle for populism, because it has become a neoliberal vehicle for giant banks. Turns out that makes a policy difference.

While Phil Gramm  and Sandy Weill played an important and pretty dirty role in repeal of the act, the repeal became possible because financial industry was united in this desire and at the moment did not have substantial opposition. On the contrary, "Main street" (aka big business) was neutral, if not supportive and Congress was split along the party lines all Republican voted for the repeal).  Also the means to bypass Glass-Steagal already were invented and widely used. Here is one insightful comment which shows the complex history of the act repeal:

2cents Says:
December 4th, 2008 at 9:20 pm

BR

This is probably not exactly what you were expecting, but here goes.

I want to start commenting on the overarching role of the DTCC as a nexus of the financial system and what it has led to. I think it goes a long way towards explaining how/why decisions were made over the decades and explains why leverage was so easily increased over time. I think this will explain why Glass-Steagall was repealed and what it accomplished. The positives and negatives become relative to which side of the fence you chose to sit.

The interesting thing is that if we look at the original movement to electronic clearing, we can see that due to physical constraints paper certificates were indeed a drag on operations. Nobody who has been around markets for 30-40 years would argue otherwise. The problem was that the masses could not implement electronic clearing in the 70’s and early 80’s. Only big institutions could afford the computers and programmers at the time (the PC was still just a glimmer). The “bridge” solution was to allow the big brokers to implement electronic clearing and to invite the masses to participate by holding securities in “street name”. The security’s owner was Cede & Co. (DTCC nominee name). Under existing law the DTCC became the legal owner of the security. You, the one who ponied up the money, are the “beneficial owner”. This is why there is no direct correspondence between you and the issuer of the security you ‘bought’. The correspondence is all via proxy (usually your broker). With both electronic and paper clearing coexisting side by side, there was always room for discrepancies to crop up and literally no way to systematically verify the source of the discrepancies. In short, the system greatly increased efficiencies and it was recognized that these discrepancies were the ‘cost’ of progress.

However, the ‘brilliant’ minds at the investment banks soon realized that these “street name” securities could be manipulated to their benefit. In fact, these securities can be counted as the investment bank’s own collateral! When you pony up your money you are effectively giving the broker free money (actually they have the gall to charge you for the money you give to them). Due to the way the system works coupled with direct broker to broker transactions, the DTCC can never be sure that what its records have agree with what actually is occurring (the DTCC’s records are supposed to reflect reality, but there are too many holes and discrepancies for it to actually attain that goal). The end result is that the investment banks have had access to free capital via the ’system’. This was akin to the fractional reserve scheme granted the C-banks! Only better!

Eventually, the Commercial Banks realized that there was no way for them to compete with this “street name” system. They wanted a piece of the action and eventually Glass-Steagall was repealed. The deal in all this was that they would provide more capital to the system and both I and C-banks would benefit. This was fine with the I-banks now because a large portion of the securities were now being held in street name. In other words, there capital base was leveling off and they could lever up much more. However, with the C-banks at the table, the I banks created collateralized securities based on C-bank assets. How did this help? First, with the banks assets now converted into securities, it allowed these assets to be held in “street name” and voila new capital and more leverage was available. As for the C-banks, they benefited by getting an immediate pay out against their portfolio via the proceeds from the sale of the collateralized securities. Money that they can then multiply via fractional reserve banking and this increased their available collateral and therefore their ability to leverage higher. The kicker is that these bank securities which had been privately/institutionally held could now be also sold to the masses. Not only did the C-banks increase their customer base, but the asset got to be used twice! First in the traditional sense by a buyer via the collateralization and secondly via the ownership privileges of having the security held in “street name”

The party was on. I think if someone were to do a retrospective of the driving force behind many actions over the last 30+ years they would find that everything was geared to transport more collateral to financial institutions to allow them to lever it so that the country got the maximum use out of each dollar. 401Ks were another mechanism to feed collateral, drawing foreign investments expanded the available pool, and housing was collateralized to again provide more collateral, etc. My point is that, over these last decades, if an action could increase the collateral available to financial institutions then it bubbled into existence. If an action reduced capital available to financial institutions then it was cancelled. This is the real basis behind the ‘freedom’ allowed to reign in the markets. This directly led to an increase in the velocity of money, but it also disguised the degeneration of true wealth. Now the velocity is being greatly slowed and the guise is being lifted. What’s happening now is that collateral positions are being reinforced to shore up what never existed in the first place. Accounting constructs were invented to maximize the use of these new found sources of fictitious collateral, but what we now find is that the system is now putting real capital in its place so as to get reality to conform to the accounting positions!

As a mater of fact, I think that in retrospect we are going to find out that the seed that this mess grew from is now a grown tree that is withering and bringing this all down. You see, all exchange traded securities are now required to be DRS (Direct Registration System) eligible. This has been an ongoing situation since 2006 and fully implemented in January of this year. This new system again was as obvious as its older sibling “street name” and had no rational argument against it. Yet, it was the beginning of the end of the feed the collateral to the financial institutions game. This was the first critical step in reducing capital available to financial institutions. You will find that all major/minor financial players now use DRS and it is the lowly small investor and 401K holder/mutual fund holder who still uses street name. This new system curbs the mismatches and discrepancies by having the issuer of the security directly involved in its movement about the financial system. Technically, the DTCC’s, the issuer’s , and the broker’s records should all agree! Because the communication is now directly between the issuer and the owner, there is less margin for hanky-panky. The legal owner and beneficial owner are again one and the same under DRS. Transparency is returning to the system and we are paying for the lack of it during the preceding decades. It is my firm belief that this single stroke will prove to be the straw that broke the camel’s back so to speak. Without this free and easy access to easy collateral, many positions had to be unwound which meant the securities most susceptible to a decrease in velocity were the ones to be hit first.

In summary, Glass-Stegall was repealed because the C-banks wanted in on the I-banks access to free collateral and the C-banks wanted it repealed because they wanted access to the pent-up assets within the C-banks to again increase access to collateral. Both had to share in order to get what the other had.

This brings us to our current situation where we are now stuck in the position of forcing reality to somehow agree with the book entries, or forcing the book entries to somehow agree with reality. Inflation if you are in the first camp and deflation if you are in the second camp. I don’t care what Obama, the FED, IMF, or whatever does, this is the battle that hey are waging. Personally, I would just prefer to adjust the book entries to agree with reality and move on. Mainly because I think that inevitably it is futile to do otherwise, but it’s not my sandbox.

Glass-Steagall Act - Wikipedia, the free encyclopedia

The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.^[1] Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.^[2][3]

Contents

• 1 Background
• 2 First Glass-Steagall Act
• 3 Second Glass-Steagall Act
  • 3.1 Impact on other countries
• 4 Repeal of the Act
  • 4.1 Financial events following the repeal
• 5 See also
• 6 References
• 7 External links

Background

Two separate United States laws are known as the Glass-Steagall Act.

Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.

The first Glass-Steagall Act was passed in February, 1932 in an effort to stop deflation and expanded the Federal Reserve's ability to offer rediscounts on more types of assets and issue government bonds as well as commercial paper.^[4] The second Glass-Steagall Act was passed in 1933 in reaction to the collapse of a large portion of the American commercial banking system in early 1933.

Although Republican President Herbert Hoover had lost reelection in November 1932 to Democratic Governor Franklin D. Roosevelt of New York, the administration did not change hands until March 1933. The lame-duck Hoover Administration and the incoming Roosevelt Administration could not, or would not, coordinate actions to stop the run on banks affiliated with the Henry Ford family that began in Detroit, Michigan, in January 1933. The Federal Reserve chairman Eugene Meyer was equally ineffectual.

While many economic historians attribute the collapse to the economic problems which followed the Stock Market Crash of 1929, some economists attribute the collapse to gold-backed currency withdrawals by foreigners who had lost confidence in the dollar and by domestic depositors who feared that the United States would go off the gold standard^[5], which it did when President Roosevelt signed Executive Order 6102, The Gold Confiscation Act of April 5, 1933.^[6]

According to a summary by the Congressional Research Service of the Library of Congress:

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.^[7]

First Glass-Steagall Act

The first Glass-Steagall Act was the first time that currency (non-specie, paper currency etc.) was permitted to be allocated for the Federal Reserve System.

Second Glass-Steagall Act

The second Glass-Steagall Act, passed on 16 June 1933, and officially named the Banking Act of 1933, introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Corporation for insuring bank deposits. Literature in economics usually refers to this simply as the Glass-Steagall Act, since it had a stronger impact on US banking regulation.^[8]

Impact on other countries

The Glass-Steagall Act has had influence on the financial systems of other areas such as China which maintains a separation between commercial banking and the securities industries.^[9][10] In the aftermath of the financial crisis of 2008-9, support for maintaining China's separation of investment and commercial banking remains strong.^[11]

Repeal of the Act

See also Depository Institutions Deregulation and Monetary Control Act of 1980, the Garn-St. Germain Depository Institutions Act of 1982, and the Gramm-Leach-Bliley Act of 1999.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by Republican majorities on party lines by a 54-44 vote in the Senate^[12] and by a 343-86 vote in the House of Representatives^[13]. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8 (1 not voting) and in the House: 362-57 (15 not voting). [These margins of passage, if repeated, would have been well over the two-thirds needed to overcome any veto, had the President returned the bill to Congress without his signature.] The legislation was signed into law by President Bill Clinton on November 12, 1999. ^[14]

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.^[7]

The argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit -- lending -- and the use of credit -- investing -- by the same entity, which led to abuses that originally produced the Act.

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them -- by diversification.

4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.^[7]

Financial events following the repeal

The repeal enabled commercial lenders such as Citigroup, which was in 1999 then the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.^[15] It is believed by some that the repeal of this act contributed to the Global financial crisis of 2008–2009^[16] , although some maintain that the increased flexibility allowed by the repeal of Glass-Steagall mitigated or prevented the failure of some American banks.^[17]

The year before the repeal, sub-prime loans were just 5% of all mortgage lending.^{[citation needed]} By the time the credit crisis peaked in 2008, they were approaching 30%.^{[citation needed]}

NEWS CONTENTS

• 20120512 : How J.P. Morgan Chase Has Made the Case for Breaking Up The Big Banks and Resurrecting Glass-Steagall by Robert Reich ( May 10, 2012 )
• 20110618 : The Banking Miracle by Joe Nocera ( Published: June 17, 2011 NYTimes.comRead All Comments (24) " )
• 20110618 : What a load of Bollocks by Steve Keen ( What a load of Bollocks, )
• 20110618 : The Long Demise of Glass-Steagall ( PBS )
• 20110618 : Glass-Steagall's Specter Returns to Haunt Wall Street by Matthew Benjamin and Christine Harper ( March 10, 2009 , Bloomberg.com )
• 20110618 : Repeal Glass-Steagall-Stiegel Act ( Associated Content )

Old News ;-)

[May 12, 2012] How J.P. Morgan Chase Has Made the Case for Breaking Up The Big Banks and Resurrecting Glass-Steagall by Robert Reich

May 10, 2012

J.P. Morgan Chase & Co., the nation's largest bank, whose chief executive, Jamie Dimon, has led Wall Street's war against regulation, announced Thursday it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets.

The bets were "poorly executed" and "poorly monitored," said Dimon, a result of "many errors, "sloppiness," and "bad judgment." But not to worry. "We will admit it, we will fix it and move on."

Move on? Word on the Street is that J.P. Morgan's exposure is so large that it can't dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.

Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).

Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again.

Since then, J.P. Morgan's lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule - creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.

And now - only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent, pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression - J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, and poorly-executed and excessively risky trades that caused the crisis in the first place.

In light of all this, Jamie Dimon's promise that J.P. Morgan will "fix it and move on" is not reassuring.

The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that's supposed to allow regulators to catch these things before they get out of hand?

Several weeks ago there were rumors about a London-based Morgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it then, Dimon called it "a complete tempest in a teapot." Using the same argument he has used to fend off regulation of derivatives, he told investors that "every bank has a major portfolio" and "in those portfolios you make investments that you think are wise to offset your exposures."

Let's hope Morgan's losses don't turn into another crisis of confidence and they don't spread to the rest of the financial sector.

But let's also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader's cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed's recent recommendation that Wall Street's giant banks be broken up should be heeded.

[Jun 18, 2011] The Banking Miracle by Joe Nocera

Politicians will only act in the interests of the people if they are forced to do so.

Published: June 17, 2011 NYTimes.comRead All Comments (24) "

The president of the American Bankers Association was railing against excessive regulation in a speech at the Waldorf Astoria. The banking reform bill, he complained, "would destroy a substantial part of our bond-distributing machinery." He added, "Can anyone expect that a step of this kind will improve the quality of our long-term investments?"

Modern echoes, for sure. But I read about the speech in a Jan. 27, 1933, article culled from the wonderful archives of The American Banker, the bankers' bible now celebrating its 175th birthday. The speaker, one Francis H. Sisson, was complaining about an early version of the Glass-Steagall Act, the most famous of all Depression-era bank laws, and the one that, in retrospect, probably did the most good. Less than six months after Sisson's speech, President Franklin Roosevelt signed it into law.

From my vantage point here in 2011, Glass-Steagall seems miraculous. It was amazingly radical, not just for its time, but for any time; it didn't so much reform banking as upend it. Most notably, it ordered banks to get out of the securities business. As Sisson complained: "The effect of the proposed banking reform is to renounce investment banking rather than regulate it." Because investment banking was then the chief activity of the big banks, this was a very big deal.

Glass-Steagall also created the Federal Deposit Insurance Corporation, which insured customer deposits for the first time, and outlawed branch banking by national banks, among other things. It is impossible to imagine anything like it passing today; although the modern reform bill, Dodd-Frank, surely does some good, it's not even comparable.

I'd long wondered how Senator Carter Glass, the powerful Virginia Democrat, and his House counterpart, the Alabama congressman Henry Steagall, managed to get it passed. What were the politics like? What did they fight over? Why didn't people like Sisson have better luck pushing back against it, the way bank lobbyists do today? So I asked the editors at American Banker if they would send me some articles from the era that would shed some light on the question. Happily, they obliged.

The first thing I realized is that all the horse-trading over the bill's provision was done by Democrats. The Republicans, having been badly defeated in the 1932 election, had no ability to block it or even amend it. For instance, Republicans tended to view the creation of deposit insurance as "socialism." (Sound familiar?) But it didn't matter: Steagall cared deeply about deposit insurance. Many community bankers - as strong a force back then as today - also supported the idea because they believed it would renew customers' faith in the banks, and bring back deposits. (This turned out to be true.) Glass, though skeptical, went along so he could get things he cared about, mainly a stronger Federal Reserve with more power over the banks.

The second thing I realized was that, the Sisson speech notwithstanding, there was surprisingly little controversy over what we now think of as the law's primary achievement: splitting commercial and investment banking. The fights were all over issues that seem inconsequential by today's lights. It's as if the notion of breaking the banking business into two was always a foregone conclusion.

And, for the most part, it was. Partly, this was because, unlike today, bank failures in the 1930s were often ruinous to customers. So reform was more pressing. But it was also because, for the entire time the legislation was under consideration, the Pecora hearings were going on - in which Ferdinand Pecora, the flamboyant chief counsel of the Senate Banking Committee, dragged one well-known banker after another before the committee and grilled them mercilessly, exposing how they had abused their investment banking roles, sometimes to the point of criminality. The Pecora hearings serve as a steady drumbeat in the American Banker articles.

Those hearings infuriated the country, and made it unthinkable that banks would continue to be allowed to sell securities. In fact, some banks, seeing which way the wind was blowing, applauded: "The spirit of speculation should be eradicated from the management of commercial banks," declared Winthrop Aldrich, the chairman of Chase National Bank, according to Michael Perino, Pecora's biographer. Ironically, Glass loathed the Pecora hearings, deriding them as "a circus, and the only thing lacking now are peanuts and colored lemonade." But the hearings made his bill - which had been filibustered by Huey Long just 18 months earlier - not just possible but inevitable.

How inevitable? Charles Geisst, a finance professor at Manhattan College and an expert on the law, says that the House and Senate didn't even bother with a roll-call vote for final passage. This seminal piece of legislation, which helped keep the banks out of trouble for the next 70-plus years, flew through on a voice vote. On Friday, June 16, 1933, when Roosevelt signed it into law, The American Banker gave the news all of three paragraphs. There was nothing left to say.

Corrine (Chicago, IL)

The Glass-Steagall Act was certainly an important and successful piece of legislation that helped prevent the types of financial collapses that had plagued our country before and leading into the Great Depression.

But it is sad that such legislation is considered "radical" in our political system because, in reality, it is the moderate position between two extremes. At one extreme we have so-called "free market" conservatives, who believe that the economy should be allowed to function with little to no regulation. At the other extreme is socialism, in which the government owns the means of production. And in the middle is the progressive ideal of putting the economy in the hands of a free market (rather than government), but using government regulations to establish and enforce rules that will allow the economy to function, thrive, and benefit society.

While there may be specific areas where one or the other of the extremes work, for the most part neither extreme leads to the best results for society. For example, just as our road system would not work without rules, you cannot raise children successfully without rules, or a professional sporting event cannot occur without rules, it is ridiculous to think that our economy can function and thrive without rules (i.e., regulations). As for socialism, a number of core functions of our economy such as producing goods, extracting resources, responding to market demand, etc. are best done by the market rather than by the government.

Time after time we have seen that, just as with Glass-Steagall, the best approach is the middle ground of stringent regulation and enforcement designed to make sure our economy runs on concepts of clear and enforceable rules that are designed to help the economy thrive and benefit society over the long run, rather than to just enrich a handful of folks at the top.

http://www.winningprogressive.org

https://www.facebook.com/pages/Winning-Progressive/195682780442236

mivogo (new york city)

"Ferdinand Pecora, the flamboyant chief counsel of the Senate Banking Committee, dragged one well-known banker after another before the committee and grilled them mercilessly, exposing how they had abused their investment banking roles, sometimes to the point of criminality..."

These bankers were shamed before all of America. Yes, we had a bit of that recently with Goldman Sachs and the other "too big to fail" investment banks testifying before Congress, but it was mostly for show, and all involved knew it. No one was going to suffer in any manner, let alone go to jail. Thus investment banks now abuse their powers more than ever, because they know being "too big to fail" leaves them virtually immune to punishment. The fact that they took the bailout money we gave them to grant loans and instead gave themselves huge bonuses says it all, revealing the contempt they have for us.

Wall Street lobbyists now outnumber lawmakers five to one, with a large percentage of them ex-lawmakers themselves in an obscene revolving door scenario. The repeal of Glass-Steagal was a prime cause of the financial disaster that befell this nation over the past five years, but bills to reinstate it were quickly watered down until they were virtually meaningless, as the lobbyists did their thing.

It's now only a matter of time until we suffer from the next financial collapse. Like an undisciplined, entitled teenager who wrecks his gaudy sports car while driving drunk, then is given a replacement with no consequence (save a fake. smirking apology) how long do you think it will take until he's in another crash? The banking industry is again speeding down the same highway. And the inevitable oncoming crash will make the last one look mild.

www.newyorkgritty.net

Doug Terry (Beyond the Beltway):

What happened to banks after passage of Glass-Steagall is that they had 70 years of prosperous operations and their depression era customers were able to put their money in the bank without fear. What we have now is an unholy partnership between the Federal government under the assumption, largely proven to be incorrect, that banks will handle funds with great care and responsibility. How did we get rid of one side of the law, yet retain the Federal responsibility? Somebody must have tricked us.

Why, oh why, do the Republicans who argue against government intervention of any sort not propose legislation immediately that would break up this partnership and free the tax payer from this overwhelming responsibility? Oh, I forget: the banks want to have their cake and eat it too. Wouldn't we all like such a deal? The Republicans will leave in place any regulation or intervention that helps big business, making hash out of the rest.

Both political parties bear responsibility for the Great Mortgage Meltdown Recession of 2006 through, when?, right now? Yes, in part, the recession, in contravention of statistical indicators, is very much still on. While both bear blame, how is it the Republicans, who pushed TARP and enlisted Democratic help in doing so, get to act as if nothing happened on their watch? How, further, do they get to now claim that further de-reg of just about everything would set us free and make us all rich again?

We have a national political culture of madness. There is no dialog, there is no center to hold. If you can't say it in an 8 second sound bite, go home. The public, those who regularly follow national issues and politics, have been brain washed into becoming rabid partisans themselves, constantly arguing along the phony left/right divide. There is no need to look at facts, history, background, just warm-up your vocal cords and shout.

Why do we need regulations? Because the human animal, left to his own devices, will choose, again and again, to line his own pockets, feed, clothe and luxuriate himself and his own family at the expense of just about any other value in the world. We now posses the technological and industrial power to plow the entire world under, if that is what it takes to make profits. Did someone ask, when do we start?

Bankers are making themselves into the enemies of ordinary people. They have piled clever, and not so clever, fees on top of fees that it wouldn't be surprising, before long, to pay a fee for having paid a fee. Wait! That sad day is here already: charging fees to pay your bill over the Internet or by phone. This is robbery by another name.

I can't imagine what kind of legislation we would need now to bring bankers down to earth. It would be a lot more draconian than Glass-Steagall and would require a virtual revolution to be passed by Congress.

Doug Terry http://terryreport.com

Marie Burns Fort Myers, Florida

In the 1960s, I read the results of a survey that found that the most admired professional people in the U.S. were bankers. Americans thought of bankers as good citizens, community leaders, men (yeah, all men) who used their wherewithal to finance worthy projects that enhanced their towns & cities and provided mortgage loans to responsible home purchasers. Are there still bankers like that in American communities? I suspect so.

But today bankers are among the most reviled of professions. With the banks increasingly centralized, the top bankers have no communities. They are completely indifferent to the common good. President Obama famously called them "fat cats" and his banker buddies cried foul; I would and have called them much worse. The boys of Wall Street are bad citizens, careless of their own customers, the nation, and the world.

Of course, if the Congress hadn't passed and President Clinton hadn't signed the Gramm-Leach-Bliley bill that ended Glass-Steagal, I guess we'd still be looking up to bankers, not because they were inherently better people than the rest of us, but because the Congress told them they had to be.

And do remember who is responsible for the demise of Glass-Steagal, my liberal friends, as you look back fondly on the Clinton presidency and the personable former president. Of course, it was not all Clinton's fault. The final version of the bill that nailed the coffin on Glass-Steagal passed overwhelmingly in both houses, with plenty of Democratic support.

On signing the bill that killed Glass-Steagal, Clinton said, "The Gramm-Leach-Bliley Act is a major achievement that will benefit American consumers, communities, and businesses of all sizes. I thank all of those individuals who played a role in the development and passage of this historic legislation." Uh-huh. Bill Clinton and his Treasury Secretaries Bob Rubin & Larry Summers, along with members of Congress from both parties, are as much responsible for the financial crisis of 2008 & the resulting exclusive club of too-big-to-fail banks as were the Republicans in Congress.

We Democrats cannot throw stones. We live in a glass house. Absent the 1999 cabal, we would still live in a Glass-Steagal house. And it might not be underwater.

The Constant Weader at www.RealityChex.com

martin Portland, Oregon

Let us not forget that Glass-Stegall was rescinded under a Democratic administration when our so called liberal president Bill Clinton signed the bill, crafted by conservative Republican senator Phil Gramm, into law.

What this did in essence was to deregulate greed in our society, and somehow expect bankers to behave honorably and responsibility instead of the money obsessed gambling addicts that they proved themselves to be.

The deregulation craze as got to be biggest political con job in modern times. We regulate sexual activity in our society, such as setting a legal age of consent. Why do we do this, because we know that there are predatory people who cannot control their urges and would prey on minors. It is hard enough to monitor these predators anyway, but at least setting rules for consent is a deterrent against abuse. Likewise, though this is more controversial, we regulate sexual relations for a fee between consenting adults, making prostitution illegal except in Nevada.

Why is earth would a society regulate sexual relations within certain parameters and yet find it acceptable to let greed go unchecked in an industry like banking, where the temptation for abuse would be almost impossible to resist?

Allan Greenspan said that he was shocked that bankers could not regulate themselves. I have never heard such a naive, ignorant assessment of human nature by a person in his position. Was this guy cloistered until he became head of the Fed? Well, actually he was getting his view of humanity from Ann Rand. She worshipped a serial killer because he rose above the laws and norms of society, so I guess deregulating banking and in essence greed would be "no problema" for her and by extension Greenspan.

The con game that Republicans run is to gin up the masses over issues of sexuality while doing everything possible behind their backs to make it as easy as possible for wanton, unchecked greed to pollute our society.

They were successful. Glass-Stegall is no longer the law of the land. Who is happy with the results except the banking class that our politicians so readily cater to.

"It's the greed,stupid!"

Jumper South Carolina

Current Chancellor of the Exchequer of the UK government, George Osborne, a Conservative Member of Parliament, announced a couple of days ago that banks must "ring-fence" their retail operations. It's the same sort of separation about which you write. The banks will also have to set aside more cash to protect against risky assets. The overall goal is protect against future tax-payer bailouts of an economy damaging level.

Canada never gave up this type of protection and hasn't suffered through the banking bankruptcies visited on the U.S. and UK.

The demise of Glass-Steagall began in earnest during the massive deregulation craze of President Reagan's second term - the mid to later 1980s.

In 1987, the Fed Board of Governors voted in favor of easing regulations under Glass-Steagall. Chairman Paul Volcker objected but was over-ridden. Thomas Theobald, the Vice Chairman of Citicorp, advocated that three "outside checks" had arisen in modern times. 1) "A very effective" SEC. 2) Knowledgeable investors. 3) "Very sophisticated" rating agencies.

Volcker objected stating that lenders would "recklessly" lower lending standards "to pursue lucrative securities offerings and market bad loans to the public."

In March 1987, the Fed raised the limit on investment revenue to 10%.

In August 1987, Alan Greenspan, former Chairman of J.P. Morgan, became Chairman of the Fed. He supported greater banking deregulation.

In 1996, with support of Greenspan, the Fed allowed banks to own investment banks with up to 25% of their business in securities underwriting.

In 1997, the Fed removed any remaining restrictions.

In 1999, "...the Graham-Leach-Bilely Act repealed the Glass-Steagall Act's restrictions on bank and security company affiliations," to quote from a NY Times summary from an article in the "Law Library."

The NY Times archives from 1999 also tell this story and presents the background color clearly showing the emotional stampede to imagined profits and growth initiated by the aggressive merger of Travelers Insurance and Citicorp and the follow-on propaganda. All that paid propagandizing of the public and paid political influence pushed Congress to pass Graham-Leach-Bilely Act and thus end the protections of Glass-Steagall.

Graham then pushed through legislation that left derivatives unregulated in 2000. The resulting conflagration of greed devoured integrity and consumed the U.S. economy and economies in Europe. It took only eight years before the U.S. financial industry was bankrupt and crippled the U.S. economy.

It wasn't only the immorality and deceit revealed by the Pecora hearings that outraged the American public. Congress knew the desperate situation among the working public.

The weekend prior to FDR taking office in March, 1932, the banks had all closed to prevent riots from expected massive runs on banks. There was no deposit insurance. While Republicans were worried about the loss of our rugged individualism, forty-percent of Americans were worried about their next meal. It seemed likely one third of the nation's schools would not open in the autumn. Life was so desperate in Appalachian areas that entire communities were eating dandelions and their children were biting their hands out of hunger.

Thousands had demonstrated in counties and cities across the nation. Several governors warned FDR that they were uncertain their militia could contain large riots.

FDR's biggest applause line in his inauguration speech came when he stated that if Congress couldn't get things corrected, he'd use his authority as commander in chief to direct the war on our unresponsive economy. Americans were so desperate they would accept a form of dictatorship to end the fear and suffering.

It was a time of grave, nearly fatal danger, to our Constitutional government. Prior to 1934, a few influential, and responsible, Republicans did help get critical recovery legislation passed. They were not concerned about regaining power but about preserving our nation.

Greed is a powerful compulsion that must be regulated. Canada never forgot that. The UK has relearned that truth. The Dodd-Frank Act acts on that truth, but in our Free Market masquerade for anything-goes economy, Dodd-Frank needs to be counter-weighted with Elizabeth Warren at the helm of the Consumer Financial Protection Bureau.

Meredith New York

Thanks for your research and excellent, well written explanation to readers of the background and politics of this important law. Maybe your next column might take up the topic of the repeal of glass steaglall and who did it and why. Was there much protest? Did the public understand what was happening and it's effect on them? To clarify the big contrast in political situation compared with 1933. That would be even more instructive to say the least.

We could see how much good the law did over the decades, and how our political culture changed so that by the 1990s, it was considered ok, even by the democrats, to trash this important protection for our financial security. We have been left much less protected from extremes in the markets, and the philosophy that allowed that is still dominant. At least we have fdic insurance. But our president has advisors who are part of the deregulation philosophy.

What are the names of lawmakers who would fight to reinstate glass steagall , and is the public yet informed of the stakes involved here for their economic well being?

Patrice Ayme Truckee, CA

For millennia, states controlled money. However, no more. Recently a Faustian bargain was struck: private individuals, the bankers, created money, the seed and back-up of that money provided by the state, and the created money under the form of lending. In exchange, banks gave that money to the economy. However, before 1933, and more recently, again, banks have been cheating, and have lent the money they created not to economic agents in the society, but to themselves. They invested it in imaginary, "derivative" symbols they exchanged with each other, a parallel universe of lies and fantasies to simulate activity and profits. http://patriceayme.wordpress.com/

MNW Connecticut

Two conclusions can be reached after reading this review of the earlier history of banking reform which brought about the Glass-Steagall Act of 1933. First, legislation must be enacted that will separate the two functions of commercial banking and investment banking. But surely we are all aware of this basic necessity. Second, hearings must be held that will once again expose the abuse by the banking industry in their investment banking role and lead to criminal charges being brought to bear - whether they prove to be successful or not.

These necessary actions will occur only if the Republicans are thoroughly trounced in all the upcoming elections in 2012. (We can always give them another chance in 2014 - but until then....... )

In the meantime let us bring pressure to bear upon our congressional representatives regarding the current bill in the House - HR 1489. Representative Marcy Kaptur of Ohio has proposed this act titled "Return to Prudent Banking Act of 2011". This Act calls for the re-instatement of the Glass-Steagall Act of 1933.

For your review: http://www.govtrack.us/congress/bill.xpd?bill=h112-1489

(Time waits for no person.)

Jeff Anderson-Lee Berkeley, CA

So in some sense, Pecora was the one who most aided the passage of the Glass-Steagall Act. His hearings created the climate that lead to its passage. With today's campaign finance regulations it is not likely that any such hearing could take place today. There is too much Wall Street money in Washington.

And now that the Djinn is out of the bottle and the SCOTUS Citizens United decision has given over control of the cork, now what? Will we need a meltdown to a full-scale depression before people realize that *de*regulation and *lower* taxes are not the solution to this crisis? Perhaps Greece and a few other European countries will default and then people will finally see that austerity is making things worse instead of better. Or perhaps before we wise up our Republican Governors will adopt the IMF/World Bank strategy and privatize all of our public assets so that we can lease them back and become a model Third World Country.

tom pittsburgh

Thank you for the research that explains how the country was able to pass Glass/Steagle. The difference between what Mr. Roosevelt was able to do in the great depression and what Mr. Obama has been able to do in the great recession has been the super majority the Dems had under Mr. Roosevelt. This was of course because the republicans were in power during the crash and the first 3 years of the depression, while Dems took control with Mr. Obama ust after the crash so had to take blame for not ending the recession, despite inheriting all the problems. And to make matters worse he has a Republican congress now preventing any progress. The Glass Steagel was gutted by the Bush administration and the best we have now is the Dodd/Frank regulations, and even these are threatened by republicans. We are in big trouble if the media doesn't expose the republican plan to deregulate wall street.

Steve Blevins Oklahoma City

Joe, you're making me nostalgic -- and that's a good thing. If every voter in America truly understood the good that Roosevelt did, our approach to today's problems would be vastly different.

Most Americans are practical. They want laws that produce good results. And by good results, I mean the well-being of the greatest number.

The problem is that most political questions originate as philosophical questions, and one of the most important philosophical questions stems from the tension between libertarianism and utilitarianism.

If you could secretly tap into the psyche of most Americans, you would find that utilitarianism (i.e., the greatest good for the greatest number) trumps libertarianism (i.e., an unencumbered right to freedom, including freedom from laws that curtail the activities of commercial banks).

Politicians, contrary to popular opinion, are smart -- at least smart enough to frame arguments in such a way as to make them appealing to voters. That's why ideologues on the right who despise regulatory legislation -- NOT because of its social effects, many of which are positive (as in the case of Glass-Steagall) -- but precisely BECAUSE IT IS REGULATORY, must couch their arguments in utilitarian terms. In other words, they must convince Americans that a nation with few laws is a nation with great empirical outcomes.

That's why, during the Republican debates, you will NOT hear that deregulation is necessary because it violates an inherent freedom of banks (even though that is precisely the libertarian argument). Instead, you will hear (though not in these exact words) that deregulation is necessary because it leads to the greatest good for the greatest number -- an appeal to America's utilitarian core.

What is the antidote?

Articles like yours today, Joe. We need more articles like this --articles that document the historical benefit of regulatory legislation. Sure, such arguments will not win over libertarians who care nothing for consequences, but they will win over the utilitarian majority.

Our challenge -- the challenge for those of us who love Roosevelt -- is to prevent the political right from erasing Roosevelt's legacy from national consciousness, and perhaps more importantly, from rewriting that legacy in a manner that suits ideological ends.

Keep up the good work, Joe.

Profbam Greenville, NC

Passed in 1933 and gutted in 1999. The US had gone through cycles of banking crises: 1900, 1913, 1920 and of course 1929. One should have predicted that with the demise of Glass-Steagall there would be a crisis within 10 years. Dodd-Frank does nothing for the basic rot in the banking system, so I predict that there will be another financial crisis within 10 years just on the basis of the history of these cycles. Interesting to note that the bill eliminating Glass-Steagall was voted for by every GOP member of the Senate and Sen. Leahy was the only Dem to vote for it. Probably the worst bill that Bill Clinton put his signature on, but Alan Greenspan told him that it would be a boon for the economy. All it did was create phony profits to justify inflated bonuses for the bankers. They got the gold mine and everyone else got the shaft.

Jon Jost Seoul, Korea

"unlike today, bank failures in the 1930s were often ruinous to customers."

I don't imagine the legion of people who lost their homes or jobs in the last few years would agree with you, nor that those whose mortgages are now under water would. And it happened because of "bank failure" though the bankers got rescued, are riding high after a total failure of their system, and the rest of us... well not so hot (and there's more to come from the cowboy banking of our era - wait as the house of cards in Europe folds and as American banks - heavy traders/investors in Euro banks take the hit again).

We could use a new Glass-Steagall but alas, the bankers some time ago bought the entire government and it is most unlikely. Instead we'll be bled to death until there are riots in the street, the military is called out to put things in order, and we devolved into an in-your-face dictatorship of the richest. It's already here, it just hasn't quite hit the Syrian level yet.

www.jonjost.wordpress.com www.cinemaelectronica.wordpress.com

pdxtran Minneapolis

Perhaps the main difference between then and now is that both parties weren't quite as in thrall to corporate and financial interests as they are now and still had some sense of being public servants as opposed to being on the take from lobbyists.

Anne West

And so, once again, as earlier in our story, at the nations banks, we need to separate "investment" which has become gambling, and insurance sales, which "invest" the proceeds, from commercial, hopefully prudent loans.

But after Citizens United it's doubtful.

John PozzerleKaty, Texas

It would not happen today. The human quality of today's congress is so poor that our country doesn't count for them anymore. Only reelection.

JPS NJ

Couple points. FDR was capable to make decisions and didn't need to cover himself with bipartisan charade. The law didn't help to drag US out of Depression for very long time. Obama wouldn't have luxury to drag slow growth recovery for more than year. If we have growth around 2% next year he will not be elected for second term.

Mary Ann Tacoma

I think it's rather typical of the establishment to make doomsday predictions when there's a sea change in their particular niche.

You may recall reading some of the comments by the anti-suffragists on the eve of *that* vote: women were not biologically fit to understand the issues and the country would turn Communistic.

J Walters New Jersey

There is some fascinating material in the historical archives of the 1929 Wall Street Crash that deserves to see the light of day today.

For example, Goldman Sachs was brought in front of Congress after the 1929 crash for selling investment trusts that lost 98 cents on the dollar just a few months after Goldmans's sold them to their clients.

In other words, just like they were eighty years ago, Goldman Sachs are still selling toxic securities to their clients, as reported in the Levin report, and apparently still getting away with it!

Or to put it another way, Goldman Sachs and the rest of Wall Street are tricking you out of your savings, the money in your investments or pension fund in the same way that they tricked your parents out of their savings and your grandparents out of theirs!

It is suprising that there is any wealth left in the country and rich bankers have not already stolen it all (perhaps they have).

You can read about Goldman Sachs historic in J K Galbraith's history of the the 1929 crash - it is pretty short and still in print - I would recommend looking it up on amazon.com.

FF Montreal

Well, we can thank Robert Rubin and Bill Clinton and of course the banking industry for getting rid of Glass Steagall. It allowed their profits and bonuses to go up and of course left us paying the tab with a government gone broke and a doubled level of unemployment. But oh well, it was surely worth it...

Eric Philadelphia

1:55 amWow. Thanks for the history lesson. I presume you bring it up to illustrate how the democrats of 2008 failed to seize the opportunity to restore sanity in our banking regulation. Can they really be that afraid of Republicans? It would appear so.

Michael Fleetwood, NY

But did the Republican party then have an activist Judicial Branch working to undermine the protection of the middle class as it does today with the Roberts court?

What a load of Bollocks by Steve Keen

May 25th, 2009 | Debtwatch

9 Comments

Two prominent economics textbook writers have recently written that the Global Financial Crisis (GFC) shows that the world needs more economics rather than less.

Writing in the New York Times, Gregory Mankiw could see some need to modify economics courses a bit in response to the GFC, but overall he felt that:

"Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses." (That Freshman Course Won't Be Quite the Same, New York Times May 23 2009)

Writing on a blog The East Asia Forum, authors Doug McTaggart, Christopher Findlay and Michael Parkin wrote that:

"The crisis has also brought calls for the heads of economists for failing to anticipate and avoid it. That idea, too, is wrong: much economic research pointed to the emerging problem.

More economic research (and teaching), not less, is the best hope of both emerging from the current crisis and of avoiding future ones." (The state of economics, East Asia Forum, May 21 2009)

What a load of bollocks.

The "principles of economics" that Mankiw champions, and the "More economic research (and teaching)" that McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.

If they meant "Principles of Hyman Minsky's Financial Instability Hypothesis", or "More Post Keynesian and Evolutionary economic research", there might be some validity to their claims. But what they really mean is "principles of neoclassical economics" and "More neoclassical economic research (and teaching)"–precisely the stuff that led to this crisis in the first place.

Neoclassical economic theory supported the deregulation of the financial system that helped set this crisis in train. See for example this New York Times report on the abolition of the Glass-Steagall Act in 1999 "CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS" (New York Times November 5th 1999). The reporter Stephem Labaton noted that:

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly…

Then he observed that

Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

This is a very apt description of the role of neoclassical economists over the last 40 years: every step of the way, they have argued for deregulation of the financial system. Now we have McTaggart and colleagues making the self-serving claim that:

The current crisis is a failure of regulation that calls for not more regulation, but the right regulation.

So the same economic theory that supported the abolition of Glass-Steagall, amongst many other Depression-inspired controls, is suddenly going to be able to do a volte-face and tell us what "the right regulation" might be? Garbage.

What is really needed is a thorough revolution in economic thought. First and foremost this has to be based on empirical reality, and from this perspective almost everything that current textbooks treat as gospel truth will end up in the dustbin.

Coincidentally, many non-neoclassical economists whose writings have been put into the dustbin by today's economics orthodoxy will be back on the shelves once more. Minsky, Schumpeter, Keynes, Veblen and Marx don't rate a mention in in most current economic textbooks; they had better feature in future texts, or by 2060 or so we'll be back here again.

Though I'm clearly annoyed at Mankiw's and McTaggart's drivel, I'm not surprised by it–in fact I predicted it (I doubt that they can point to anything they wrote prior to the GFC that predicted it!). I said the following in an article "Mad, bad, and dangerous to know" published on March 12 2009 in issue 49 of the Real World Economics Review:

Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier…

they will interpret the crisis as due to poor regulation,…

They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.

Sometimes, I would like to be wrong…

Finally, what lesson did neoclassical economists take from the Great Depression? That the Federal Reserve caused it via poor economic policy. Who do current neoclassical economists blame for this crisis? The Federal Reserve of course, for poor economic policy:

By 2007, fuelled by the Federal Reserve's egregious policy errors, markets were moving into unsustainable bubble territory. The Fed by this time had realized the problem was getting out of hand and had moved interest rates up sharply-too sharply-and burst the house price bubble. (McTaggart et al).

But who staffs the Federal Reserve? Neoclassical economists of course…

Please, let's not fall for this nonsense a second time. Keynes tried to free us from neoclassical economic thinking back in the 1930s, only to have neoclassical economists like John Hicks and Paul Samuelson eviscerate Keynes's thought and re-establish a revitalised neoclassical economics after the Depression was over. This time, let's do it right and get rid of neoclassical economics once and for all.

The Long Demise of Glass-Steagall

PBS

A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup's Sandy Weill dealt the coup de grâce.

1933 Glass-Steagall Act creates new banking landscape

Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthens the Federal Reserve's control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.

First efforts to loosen Glass-Steagall restrictions

Beginning in the 1960s, banks lobby Congress to allow them to enter the municipal bond market, and a lobbying subculture springs up around Glass-Steagall. Some lobbyists even brag about how the bill put their kids through college.

In the 1970s, some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards.

Fed begins reinterpreting Glass-Steagall; Greenspan becomes Fed chairman

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase "engaged principally" in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

In March 1987, the Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, applying the same reasoning as in the 1986 Bankers Trust decision, and in April it issues an order outlining its rationale. While the Board remains sensitive to concerns about mixing commercial banking and underwriting, it states its belief that the original Congressional intent of "principally engaged" allowed for some securities activities. The Fed also indicates that it will raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- becomes chairman of the Federal Reserve Board. One reason Greenspan favors greater deregulation is to help U.S. banks compete with big foreign institutions.

Further loosening of Glass-Steagall

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

Congress repeatedly tries and fails to repeal Glass-Steagall

In 1984 and 1988, the Senate passes bills that would lift major restrictions under Glass-Steagall, but in each case the House blocks passage. In 1991, the Bush administration puts forward a repeal proposal, winning support of both the House and Senate Banking Committees, but the House again defeats the bill in a full vote. And in 1995, the House and Senate Banking Committees approve separate versions of legislation to get rid of Glass-Steagall, but conference negotiations on a compromise fall apart.

Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another, as factions of these industries engage in turf wars in Congress over their competing interests and over whether the Federal Reserve or the Treasury Department and the Comptroller of the Currency should be the primary banking regulator.

Fed renders Glass-Steagall effectively obsolete

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

Sandy Weill tries to merge Travelers and J.P. Morgan; acquires Salomon Brothers

In the summer of 1997, Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with J.P. Morgan (before J.P. Morgan merged with Chemical Bank), but the deal collapses at the last minute. In the fall of that year, Travelers acquires the Salomon Brothers investment bank for $9 billion. (Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.)

Weill and John Reed announce Travelers-Citicorp merger

At a dinner in Washington in February 1998, Sandy Weill of Travelers invites Citicorp's John Reed to his hotel room at the Park Hyatt and proposes a merger. In March, Weill and Reed meet again, and at the end of two days of talks, Reed tells Weill, "Let's do it, partner!"

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world's largest financial services company, in what was the biggest corporate merger in history.

The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commecial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement to sound them out on the merger, and later tells the Washington Post that Greenspan had indicated a "positive response." In their proposal, Weill and Reed are careful to structure the merger so that it conforms to the precedents set by the Fed in its interpretations of Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup would have two years to divest itself of the Travelers insurance business (with the possibility of three one-year extensions granted by the Fed) and any other part of the business that did not conform with the regulations. Citigroup is prepared to make that promise on the assumption that Congress would finally change the law -- something it had been trying to do for 20 years -- before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government officials for their support. In late March and early April, Weill makes three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury Secretary Robert Rubin, and President Clinton. On April 5, the day before the announcement, Weill and Reed make a ceremonial call on Clinton to brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23. The Fed's press release indicates that "the Board's approval is subject to the conditions that Travelers and the combined organization, Citigroup, Inc., take all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal. ... The Board's approval also is subject to the condition that Travelers and Citigroup conform the activities of its companies to the requirements of the Glass-Steagall Act."

1998-1999 Intense new lobbying effort to repeal Glass-Steagall

Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive bill.

Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session of Congress. While the Clinton administration generally supported Glass-Steagall "modernization," but there are concerns that mid-term elections in the fall could bring in Democrats less sympathetic to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that allows for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress is yet again unable to pass final legislation before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

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?"

Glass-Steagall's Specter Returns to Haunt Wall Street By Matthew Benjamin and Christine Harper

March 10, 2009 | Bloomberg.com

A decade after Wall Street killed off the Glass-Steagall Act that separated commercial banks from securities firms, its ghost has returned to haunt the financial industry.

Comments by Paul Volcker, the former Federal Reserve chief advising President Barack Obama, and Federal Deposit Insurance Corp. Chairman Sheila Bair in the past week suggest it will become more costly for banks to remain in some of the areas they were let into with Glass-Steagall's 1999 repeal, analysts said.

"The capital-market rules are going to change," Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in a Bloomberg Television interview. For firms that remain banks, "it's going to be much more difficult to trade in the illiquid parts of the market" beyond government and corporate bonds, and to borrow to finance investments, he said.

Hedge funds will increasingly take over business in riskier areas such as emerging-market and distressed securities, predicted Hintz, who served as chief financial officer of Lehman Brothers Holdings Inc. from 1996 to 1998.

By removing the barrier between everyday banking such as lending and deposit-taking and riskier areas such as derivatives trading, Glass-Steagall's 1999 repeal helped create the current crisis, according to some policy makers and politicians.

'Never' Again

"You can't break the bank and lose everyone's" pension investments "without expecting a real food fight with respect to laying blame and trying to fix the financial system so this never happens again," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Volcker called for a "two-tier" financial system that would limit risk-taking by the most systemically important firms, at a conference in New York March 6. Bair said in an interview with CBS that aired March 8 that Congress should curtail the size of the biggest banks.

Fed Chairman Ben S. Bernanke today said the central bank has already stepped up surveillance of the systemically important firms, and that such companies require "especially close oversight." He spoke at the Council on Foreign Relations in Washington.

Many on Wall Street are now resigned to jettisoning some sources of revenue and paring back others in order to comply with a new regulatory regime. How that regime will look around the world is set to be discussed when finance ministers and central bankers from the Group of 20 nations meet this week near London before an April 2 summit of leaders.

Morgan Stanley

"Some of the businesses that we've been in in the past are going to be curtailed," Morgan Stanley Chief Executive Officer John Mack said on Feb. 23.

Obama has told his aides to work with Congress on shaping proposals for regulatory changes within weeks.

Obama himself has decried the way Glass-Steagall was undone, saying it left a regulatory vacuum that contributed to the current crisis.

"A regulatory structure set up for banks in the 1930s needed to change," then-candidate Obama said in a March 27, 2008, speech at New York City's Cooper Union. "But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

Obama referred to a campaign by companies such as Citigroup Inc., Merrill Lynch & Co. and Aetna Inc. in the late 1990s to overturn the law. Its demise allowed banks, insurance companies and securities firms to integrate and compete with one another.

Citigroup's Birth

Citicorp, a commercial bank, and insurance company Travelers Group Inc. announced a merger in 1998 that needed Glass- Steagall's repeal to become legal. The combined entity became Citigroup.

As commercial banks sought to compete with investment banks, they took bigger trading risks and created off-balance-sheet financing vehicles to help reduce the capital they needed to hold to protect against loan losses. Investment banks became more aggressive in lending to companies and increased their own borrowing to buy securities or real estate.

Phil Gramm, a Republican senator from Texas who co-authored the Gramm-Leach-Bliley Act that repealed many key provisions of Glass-Steagall, later went to work for UBS AG, the Swiss bank whose foray into investment banking contributed to an 88 percent drop in its shares since June 2007. Robert Rubin, a Clinton administration Treasury secretary who advocated Glass-Steagall's repeal, went on to work for Citigroup, which lost $27.7 billion in 2008 and has needed $45 billion in government funds to remain solvent.

Questioning the 'Threshold'

"Taxpayers rightfully should ask that, if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold," FDIC's Bair said March 8 on the CBS News program "60 Minutes."

The financial conglomerates enabled by the lifting of Glass- Steagall restrictions are "unmanageable," Volcker said in January. Traditional commercial banking shouldn't be combined with "very risky capital market activities," he said.

Some argue that Glass-Steagall's repeal is not to blame for the current financial crisis.

"There's nothing any of these groups did that they couldn't do before," said Jim Leach, a former Republican congressman from Iowa who helped engineer the law's undoing. Rather, the fault lies with "the greatest regulatory breakdown in history, on the part of the Fed, the Treasury and the Securities and Exchange Commission," said Leach, now a professor at Princeton University's Woodrow Wilson School.

Return to Washington

Several officials who supported the 1933 law's repeal have returned to positions of power in Washington in the current administration. Most prominent among them is Lawrence Summers, Obama's top economic adviser, who succeeded Rubin as Treasury secretary in the Clinton administration. Timothy Geithner, who now serves as Treasury secretary, was undersecretary for international affairs under Rubin and Summers.

Advocates of reinstalling barriers between investment and commercial banking "will run into a little bit of opposition from the same people who fought so hard for the death of Glass- Steagall," Alan "Ace" Greenberg, the former Bear Stearns Cos. chief executive officer said on Bloomberg Television March 9.

To contact the reporter on this story: Matthew Benjamin in Washington at [email protected]; Christine Harper in New York at [email protected].

Repeal Glass-Steagall-Stiegel Act

Associated Content

The Glass Steagall Act (not Glass Stiegel Act, as some misspell) was setup over 70 years ago by the United States Federal Deposit Insurance Corporation. The Glass Steagall/Glass Stiegal Act was repealed 9 years ago in 1999 by President Bill Clinton. Some of the current financial problems in the United States in the mortgage industry could potentially be in part due to the repeal of the Glass Steagall Act. This has caused numerous financial advisors to look into the repeal Glass Stiegel Act.

Stiegel History of the Glass-Steagall Act repeal:

According to Forbes magazine, the formation of the Glass-Steagall Act arose in 1933. It was formed by Congress shortly after the stock market plumetted in 1929 while there was bank collapse across the United States (source). Essentially, the Glass Stiegel Act "separated investment and commercial banking" and may have potentially "hindered the establishment of financial services firms that can equally compete against each other" (source), which led to the repeal of the Glass Steagall Act.

Glass Stiegel Repeal Information: Did the Glass Steagal Repeal Destroy the American Economy?

The Glass Steagall Act helped compartmentize the U.S. financial industry in an effort to prevent future collapses and failures of U.S. banks such as what happened in the '30s. With the repeal of the Glass Stiegel/Glass Steagall act, the door was opened for a repeat of the pre-Glass Steagall Act era.
\
Stiegel History: Repeal of the Glass-Steagall Act

According to PBS Frontline, it took decades to repeal the Glass Stiegel Act. The Glass Steagall Act was finally repealed in 1999 after what Frontline calls "12 attempts in 25 years," with "Congress finally repeal[ing] 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" (source).

Steagall Repeal History: Why the Glass Steagall Act Was Necessary:

One of the reasons the Glass-Steagall Act was important for the financial security of the United States was because of bank speculation, much like what is happening in the current subprime mortgage crisis in the U.S. Back in the 1930s, many American banks were said to be dangerously speculative. Many banks, in the hopes of reaping financial rewards, took large risks, thus endangering the entire financial market. The Glass-Steagall Act was created to prevent such speculation on behalf of the banks.

Do we need to undo the Glass Stiegel repeal? Only time will tell as the current Bush administration battles the financial crisis in the United States. A new form of the Glass-Steagall Act may be necessary to revive the U.S. markets.

Selected Comments

1. You won't hear Limblahh, Hannity, OReilly and the rest of the right wing idiots talking about this. They don't give a damn about our country. All they care about is duping as many fools as they can into believing all regulation is bad. Republicans are whining now because Pres Obama is proposing a trillion dollars in spending. Republicans don't care that their deregulation led to the loss of up to 20 trillion dollars. Republicans could not care less about average Americans. All they care about is giving our country away to corrupt corporate criminals. It is amazing how ignorant republicans and conservatives are. They will continue to listen to and believe everything they are told by right wing radio freaks.
2. Here you are Anne, Learn to read. 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
3. willid3 Says:
   December 4th, 2008 at 9:05 pm

   well it got us those dandy high oil prices for one thing since it reduced over sight over commodities. nt sure that it didn't create the housing bubble too. but the first one it definitely has that covered!

   ~~~
   BR: Wrong legislation
   

4. 2cents Says:
   December 4th, 2008 at 9:20 pm

   BR

   This is probably not exactly what you were expecting, but here goes.

   I want to start commenting on the overarching role of the DTCC as a nexus of the financial system and what it has led to. I think it goes a long way towards explaining how/why decisions were made over the decades and explains why leverage was so easily increased over time. I think this will explain why Glass-Steagall was repealed and what it accomplished. The positives and negatives become relative to which side of the fence you chose to sit.

   The interesting thing is that if we look at the original movement to electronic clearing, we can see that due to physical constraints paper certificates were indeed a drag on operations. Nobody who has been around markets for 30-40 years would argue otherwise. The problem was that the masses could not implement electronic clearing in the 70's and early 80's. Only big institutions could afford the computers and programmers at the time (the PC was still just a glimmer). The "bridge" solution was to allow the big brokers to implement electronic clearing and to invite the masses to participate by holding securities in "street name". The security's owner was Cede & Co. (DTCC nominee name). Under existing law the DTCC became the legal owner of the security. You, the one who ponied up the money, are the "beneficial owner". This is why there is no direct correspondence between you and the issuer of the security you 'bought'. The correspondence is all via proxy (usually your broker). With both electronic and paper clearing coexisting side by side, there was always room for discrepancies to crop up and literally no way to systematically verify the source of the discrepancies. In short, the system greatly increased efficiencies and it was recognized that these discrepancies were the 'cost' of progress.

   However, the 'brilliant' minds at the investment banks soon realized that these "street name" securities could be manipulated to their benefit. In fact, these securities can be counted as the investment bank's own collateral! When you pony up your money you are effectively giving the broker free money (actually they have the gall to charge you for the money you give to them). Due to the way the system works coupled with direct broker to broker transactions, the DTCC can never be sure that what its records have agree with what actually is occurring (the DTCC's records are supposed to reflect reality, but there are too many holes and discrepancies for it to actually attain that goal). The end result is that the investment banks have had access to free capital via the 'system'. This was akin to the fractional reserve scheme granted the C-banks! Only better!

   Eventually, the Commercial Banks realized that there was no way for them to compete with this "street name" system. They wanted a piece of the action and eventually Glass-Steagall was repealed. The deal in all this was that they would provide more capital to the system and both I and C-banks would benefit. This was fine with the I-banks now because a large portion of the securities were now being held in street name. In other words, there capital base was leveling off and they could lever up much more. However, with the C-banks at the table, the I banks created collateralized securities based on C-bank assets. How did this help? First, with the banks assets now converted into securities, it allowed these assets to be held in "street name" and voila new capital and more leverage was available. As for the C-banks, they benefited by getting an immediate pay out against their portfolio via the proceeds from the sale of the collateralized securities. Money that they can then multiply via fractional reserve banking and this increased their available collateral and therefore their ability to leverage higher. The kicker is that these bank securities which had been privately/institutionally held could now be also sold to the masses. Not only did the C-banks increase their customer base, but the asset got to be used twice! First in the traditional sense by a buyer via the collateralization and secondly via the ownership privileges of having the security held in "street name"

   The party was on. I think if someone were to do a retrospective of the driving force behind many actions over the last 30+ years they would find that everything was geared to transport more collateral to financial institutions to allow them to lever it so that the country got the maximum use out of each dollar. 401Ks were another mechanism to feed collateral, drawing foreign investments expanded the available pool, and housing was collateralized to again provide more collateral, etc. My point is that, over these last decades, if an action could increase the collateral available to financial institutions then it bubbled into existence. If an action reduced capital available to financial institutions then it was cancelled. This is the real basis behind the 'freedom' allowed to reign in the markets. This directly led to an increase in the velocity of money, but it also disguised the degeneration of true wealth. Now the velocity is being greatly slowed and the guise is being lifted. What's happening now is that collateral positions are being reinforced to shore up what never existed in the first place. Accounting constructs were invented to maximize the use of these new found sources of fictitious collateral, but what we now find is that the system is now putting real capital in its place so as to get reality to conform to the accounting positions!

   As a mater of fact, I think that in retrospect we are going to find out that the seed that this mess grew from is now a grown tree that is withering and bringing this all down. You see, all exchange traded securities are now required to be DRS (Direct Registration System) eligible. This has been an ongoing situation since 2006 and fully implemented in January of this year. This new system again was as obvious as its older sibling "street name" and had no rational argument against it. Yet, it was the beginning of the end of the feed the collateral to the financial institutions game. This was the first critical step in reducing capital available to financial institutions. You will find that all major/minor financial players now use DRS and it is the lowly small investor and 401K holder/mutual fund holder who still uses street name. This new system curbs the mismatches and discrepancies by having the issuer of the security directly involved in its movement about the financial system. Technically, the DTCC's, the issuer's , and the broker's records should all agree! Because the communication is now directly between the issuer and the owner, there is less margin for hanky-panky. The legal owner and beneficial owner are again one and the same under DRS. Transparency is returning to the system and we are paying for the lack of it during the preceding decades. It is my firm belief that this single stroke will prove to be the straw that broke the camel's back so to speak. Without this free and easy access to easy collateral, many positions had to be unwound which meant the securities most susceptible to a decrease in velocity were the ones to be hit first.

   In summary, Glass-Stegall was repealed because the C-banks wanted in on the I-banks access to free collateral and the C-banks wanted it repealed because they wanted access to the pent-up assets within the C-banks to again increase access to collateral. Both had to share in order to get what the other had.

   This brings us to our current situation where we are now stuck in the position of forcing reality to somehow agree with the book entries, or forcing the book entries to somehow agree with reality. Inflation if you are in the first camp and deflation if you are in the second camp. I don't care what Obama, the FED, IMF, or whatever does, this is the battle that hey are waging. Personally, I would just prefer to adjust the book entries to agree with reality and move on. Mainly because I think that inevitably it is futile to do otherwise, but it's not my sandbox.
   

5. DMR Says:
   December 4th, 2008 at 9:37 pm

   As things stand, the standalone Investment banks have been the ones that have collapsed this year. Commercial and Retail banks provide sources of cash, which in a crisis can cushion the blow. This would support the Greenspan theory on "flexibility".

   But, a true comparison cannot be made unless we can measure the effects of the collapse of a post Glass-Steagall behemoth like Citi, JPMC, or BofA. I would imagine that if such a crisis were to occur, my previous paragraph would appear rather naive!

   ~~~

   BR: Citi, WAMU, Countrwide, AIG - none are standalone investment banks.

6. Crabbybill Says:
   December 4th, 2008 at 9:58 pm

   Is it my imagination or did the number of 'commingled' and 'pooled asset' investment funds that are not registered with anybody, increase dramatically in 401k offerings during 1999 and 2000. These things are black holes when it comes to reporting!
   

7. Marcus Aurelius Says:
   December 4th, 2008 at 10:43 pm

   Gramm-Leach-Bliley, along with little or no enforcement or oversight of the newly liberated "Financial Services" entities created by the inherent repeal of Glass-Stegal, led directly to the problems we are experiencing today. The best analogy would be to repeal speed limit laws, and to tell traffic cops it was okay (even recommended) that they only patrol their local Dunkin' Donuts.

   Sarbanes-Oxley, while full of good intentions, is also meaningless without strict enforcement. Being that there is a paper trail mandated by SarbOx, we should be seeing a tidal wave of prosecutions related to out current financial cluster____.

8. RiskAverseAlert Says:
   December 4th, 2008 at 11:05 pm

   It is not just the repeal of Glass-Steagall that brought us to this plainly bankrupt point. Given the commitment to wipe out capital intensive industry in the U.S. as part of a drive to magnify short-term profit opportunities in the private sector, the repeal of Glass-Steagall made sense. However, this drive being the dominant activity within an economic paradigm whose mantra remains "Inflate or Die" has brought us to the point where the co-mingling of Commercial and Investment banking is no longer the most dire threat to our posterity as a developed, civilized nation. Rather it is the co-mingling of a thoroughly bankrupt economic ideology with the U.S. Treasury that stands as an unprecedented threat as ominous as global thermonuclear war.

   Without a sound agency at the core of our society assured in its capacity to utter credit whenever this might be most needed, a systemic crisis larger than the one we are experiencing at present stands as a potential means of destroying the American Republic.

   The Treasury may be able to float its debt today, but tomorrow might be a different story…

   Whether one would argue this vulnerability is being promoted intentionally really is irrelevant. What matters is only that the U.S. Treasury has been induced into sustaining the bankrupt paradigm whose mantra is "Inflate or Die," and this increases the potential risk of a Great Calamity. For this alone, Paulson, Bernanke, and many others might rightly be charged with treason…
   

9. David Merkel Says:
   December 4th, 2008 at 11:31 pm

   Barry, I don't think GLB is the problem. Here are the problems as I see them:

   1) We should not let institutions get TBTF. Risk-based capital charges need to increase with firm size, creating a disincentive for hyper-large firms.
   2) We need one overarching national financial regulator for all depositary institutions, aside from insurers. For structural reasons, banks will not buy insurers, though insurers will own little banks and thrifts.
   3) Required capital needs to be contra-cyclical. As booms go on capital must increase.
   4) All assets and liabilities must be brought onto the balance sheet.
   5) Any asset that the regulators can't understand fully should be prohibited to regulated institutions.
   6) Total separation of regulated and non-regulated financials - no derivatives, no debt, no equity.
   7) We need to limit the Fed's ability to limit recessions, so that overall debt levels do not get out of hand.

   Those are the problems we need to solve. GLB is a sideshow.
   

10. Ace Says:
    December 4th, 2008 at 11:33 pm

    Repeal of Glass Steagall did two things that are both related:

    1) allowed commercial banks to merge with investment banks. Would the Citi's, BofA's, and Chase's of the world jumped into structured finance, CDS, and CDOs if they didn't have investment banking arms?

    2) created institutions that were too big to fail. If it were just the investment banks that were the root of credit crisis, it would have soften the blow substantially. Hell, all the big Wall St banks could have been put to death and I bet the country would not have skipped a beat, but also would be MUCH better off in the long run. Smaller boutiques and privately held banks would have filled the gaps left by the failure of the BSCs, LEHs, and MERs of the world. There was actually proper risk management controls and moral hazard in the securities industry when the big i-banks were private partnerships.

11. t1dude Says:
    December 5th, 2008 at 3:17 am

    IMHO, Gramm-Leach (repeal of Glass Steagall) was the lynch-pin in the entire meltdown. But for the passage of Gramm-Leach, Credit Default Swaps would not be legal. If they were not legal, there would be no meltdown.

    Obviously, there are other factors at play: blind greed, incompetence, stupidity, irresponsible behavior at every point in the lending process, etc, etc. I am not trying to discount these problem. I am just pointing out that we managed to avoid this kind of calamity for 60+ years, then suddenly after Gramm-Leach we encounter huge problems very similar to those that Glass-Steagall was designed to prevent (problems that were encountered 60+ years ago before Glass-Steagall). Coincidence? Maybe.

    Perhaps there is a place for CDS's and other derivatives, but opening the flood gates and a zeal for turning a blind eye was certainly stupid. I am so sick of ideology over evidence I can barely stand it.

    ~~~~
    BR: are you referring to the Commodity Futures Modernization Act ?

12. Steve Barry Says:
    December 5th, 2008 at 6:17 am

    CNBC often hypes up the jobs number as being so critical…this time it is an understatement. Since Americans have virtually no savings, a single job loss will likely translate into a foreclosure if they own a home. You can re-fi to zero and they will still default. Job losses are going to explode higher and the market must tank accordingly. Put/calls and short interest are dangerously low to stop a market plummet if the number is very bad.

13. danm Says:
    December 5th, 2008 at 8:02 am

    The length of 2cents explanation plus the number of reasons posted by others confirms how complex our system has become and how easy it is today to miss the forest for the trees.

    For me, the repeal of Glass-Stegall was more philosophical: a red flag. It meant that we had completely forgotten the Great Depression, convinced we could never repeat it. It was another mental check on my long list of items that would lead us to a full blown credit crisis.

    It's not one thing that put us in dire straights. It's been a little thing here and there along the way for the last few decades. It's like when you put on weight. A pound here and there until you wake up one morning, look in the mirror and wonder where all those extra pounds came from.

14. Robert M Says:
    December 5th, 2008 at 8:41 am

    It was a horrible mistake. the concentration of banking power in our country was not what it is in Europe and elsewhere. As a consequence the "so-called juicy parts" became available to the merchant/investment side where the absense of risk margin allowed them to take the best advantage of it. Itis the Gram Leach bill was/is the more dangerous move as it allowed commodity products which already had low margins now had none. In addition commodities moved into a world wide phenomena simultaneouly with the rise of the PRC manufacturing economy, creating an even bigger bubble worldwide.
    they both need to be repealed.

15. constantnormal Says:
    December 5th, 2008 at 9:20 am

    Here's a counter-question:

    How bad will things have to get before we have the Congressional backbone to work out viable legislation to change the system in a beneficial (i.e., more stable) way?

    I can envision things like extending the antitrust laws to encompass TBTF situations, automatically mandating breakups (no fault, no blame) when corporations exceed certain metrics of size and/or market share. I think that would lead to healthier markets.

    For instance, if Microsoft had been broken up back when they lost their antitrust case, instead of rewarding them with mandated "gifts" of free software into markets that they had previously found to be difficult to penetrate, it seems likely to me that the industry would be stronger today and the stockholders better rewarded, much as when AT&T was broken up (in that instance, progress increased, prices came down, and stockholders were richly rewarded). I don't think that anyone can credibly argue that Microsoft is, in its current form, too unwieldy to innovate and lead the markets. New releases take too long to bring to market, and quality control is much lower than it ought to be. Their games division is still not turning acceptable profits, and the over all ROI from that particular business must be regarded as a disaster. Same thing with their business services division.

    But just how likely is it in our current lobbyist-directed Congress of feeble minds, that ANY kind of sweeping legislation could be proposed that would break up companies when they became TBTF?

    Another kind of rewriting of the rules would be some kind of legislation (GAAP rule changes might also accomplish this) to more tightly control leverage and limit the amount of risk that public corporations can take on. Again, not very likely that such rule changes would make it past the industry lobbyists.

    And then there is the issue of regulating (i.e., making some rules to keep things from degenerating into effective frauds, as has occurred in the CDS markets) new financial instruments, and providing transparency and traceability throughout the markets (fixing the major problem in the CDO concept).

    We probably need misery and agony comparable to that of the Great Depression before Congress would be motivated to make structural changes like that. Of course, it would be a Congress utterly devoid of members with more than one or two terms in office, those having been ejected by enraged voters. Ultimately, THAT's where Congressional motivation comes from - fear and greed, just like everyone else.

16. RugbyD Says:
    December 5th, 2008 at 10:14 am

    I'm not going to claim to be well-versed in this matter, but an all-or-none repeal/re-enact approach seems simplistic and shortsighted. To a certain extent I think some people are doing the equivalent of blaming the car driven by the 12yr-old for the hit & run. 12yr-olds aren't supposed to drive cars but we don't take cars off the road to prevent such things. I would think there's a way to construct a regulatory regime using lessons learned in the past few years. The world is a very different place than when Glass-Stegall was passed and current legislation should reflect those differences. Also, was the Gramm bill a pre-req to allowing the Big 5 to lever up 30-40x? I honestly don't know the answer.

17. t1dude Says:
    December 5th, 2008 at 11:34 am

    danm - you hit the nail on the head. This is along the lines of the sentiment that I tried to convey in my comment. You stated is very nicely and succinctly. Nice work.

18. Winston Munn Says:
    December 5th, 2008 at 12:14 pm

    The irony is that Glass-Steagall was a confirmation of free enterprise and capitalism. The purpose was to divide depository institutions from investing institutions, granting safeguards to the depository institutions while allowing the investing institutions to succeed or fail unfettered by governmental stipulations.

    The repeal of G-S was based on hubris, the same type of arrogant pride that led Ben Bernanke to claim "The Great Moderation" was due to improved central banking.

19. retrogrouch Says:
    December 5th, 2008 at 12:27 pm

    While there's a lot of debate about the technical impacts of the repeal G-S, from my perspective one of the principle results and simpler things was it facilitated the i and c bank mergers, allowing ever larger entities and giving us the "too big to fail" institutions.

20. SpeakToMe Says:
    December 5th, 2008 at 12:49 pm

    This thread has made me rethink some things about the current financial crisis.

    I still believe that the crisis was caused by a massive mistake in measuring risk in the mortgage market and overleverage. I no longer think that these errors can be mitigated in the future simply through better disclosure. I think we also need to force some separation of risks into the financial sector. This is a way for us as a society to hedge our bets.

21. Peter Pan Says:
    December 5th, 2008 at 1:02 pm

    I was under the impression that the GLB legislation was passed so that a Fed regulated bank could be combined with an investment bank and an insurance company or any combination of each. The primary example being Citi and Travelers, promoted by Robert Rubin for which he was substantially rewarded.

    Of course Alan Greenspan had been undermining Glass-Steagall for some time. Combine that with the CFMA legislation and the SEC allowance of investment bank to go from 12 times leverage to 30 to 40 times leverage and you've got yourself a fairly decent potion of explosives.

    So you've got Fed regulated banks tied at the right hip to investment banks (shadow banking) and tied at the left hip to insurance companies (shadow insurance) which offers an excellent means to transmit the explosive forces.

    Perhaps the primary benefit of Glass-Steagall is to help defend against transmission of the explosive force.

22. Peter Pan Says:
    December 5th, 2008 at 1:04 pm

    Correction: Alan Greenspan had been undermining Glass-Steagall for some time, not GLB.

23. montysano Says:
    December 5th, 2008 at 1:48 pm

    Add all this up: GLB, CFMA, allowance of 30x to 40x leverage. Realize that the swaps market was still relatively small circa 2000, then began geometric growth around 2005.

    Is there any way to characterize this other than: the greatest act of financial irresponsibility (or financial incompetence, or both) in history?

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Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy

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War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotes :  Somerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose Bierce :  Bernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOS :  Programming Languages History : PL/1 : Simula 67 : C : History of GCC development :  Scripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-Month :  How to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D

The statements, views and opinions presented on this web page are those of the author (or referenced source) and are not endorsed by, nor do they necessarily reflect, the opinions of the Softpanorama society. We do not warrant the correctness of the information provided or its fitness for any purpose. The site uses AdSense so you need to be aware of Google privacy policy. You you do not want to be tracked by Google please disable Javascript for this site. This site is perfectly usable without Javascript.

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