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Thursday, 09 July 2015 07:16

Senate Bill Would Reinstate Glass-Steagall Act to Keep Banks From Gambling With Our Money

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT

aaaaaglasssThe repeal of the Glass-Steagall Act unleashed the big banks to go on a gambling spree. (Photo: theglobalmovement)

The odd couple of Sen. Elizabeth Warren (D-Massachusetts) and Sen. John McCain (R-Arizona) have teamed up to reinstate the Glass-Steagall Act, a piece of legislation that would essentially split commercial banks from investment banking institutions. A July 7 article in The Hill provides some background:

Glass-Steagall was first passed in 1933 but repealed during the Clinton administration, leading many progressives to argue that it contributed to the 2008 financial collapse.

Warren and McCain, along with their cosponsors, Sens. Angus King (I-Maine) and Maria Cantwell (D-Wash.), said in a statement that the legislation would make big banks that are "too big to fail" smaller and safer and minimize the likelihood of a government bailout.

The bill, which they first introduced in the last Congress, would separate traditional banking with checking and savings accounts from financial institutions that offer services such as investment banking, which are riskier.

The repeal of the Glass-Steagall Act in Bill Clinton's second term has become symbolic of the sharp neoliberal economic turn that made DC Republicans and Democrats fairly indistinguishable on the financial front, with both parties trumpeting laissez faire policies in relation to Wall Street. By the beginning of the new century, both parties supported the practice of unleashing Wall Street to engage in rash risk-taking, with very little accountability.

Even though the near implosion of the US economy in 2008 has come and gone, the negative impact of the jettisoning of the Glass-Steagall Act can be seen in the ongoing revelations about Wall Street misbehavior. This includes everything from manipulating the financial currency market, to laundering drug money, to helping wealthy individuals avoid paying taxes and more.

The core of the Glass-Steagall Act was a prohibition on the handling of personal and business banking - including services such as loans, savings accounts and checking - by firms that primarily engage in investment strategies. Without Glass-Steagall as an active law, the major Wall Street mega-banks, which hold a majority of financial assets among banks, have become free to use consumer and business funds as assets to engage in highly speculative financial activity.

The consumer advocacy group Public Citizen also points out that without Glass-Steagall, the big banks can rely on the government to bail them out, as happened in 2008, thus removing an incentive to behave responsibly:

"Banking should be boring," explained Bartlett Naylor, financial policy advocate for Public Citizen’s Congress Watch division. "With the erosion of the 1933 separation between safe and speculative banking, however, bankers have used their government-guaranteed debt, also known as deposits, to make risky bets."

The restoration of the 1933 wall of separation between investment and commercial banking has drawn support from the likes of John Reed and Sanford Weill. Reed and Weill were the architects of Citigroup, the bank that first breached this barrier. 

"These veteran bankers understand from experience that mixing these businesses defied prudent management," added Naylor.

Furthermore, as BuzzFlash has repeatedly pointed out over the last few years - with two columns this week alone - the Department of Justice and Securities and Exchange Commission have been loath to compel any meaningful changes in the errant behavior of banks "too big to fail."

news release from the Senate office of Warren states that she, for one, is introducing the re-instatement of Glass-Steagall because such a step

reduces risk for the American taxpayer in the financial system and decreases the likelihood of future financial crises.

The legislation, first introduced in the 113th Congress by Senators Warren, McCain, Cantwell and King, would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. The bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall and would make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout.

The bottom line is this: "Despite the progress we've made since 2008, the biggest banks continue to threaten our economy," says Warren.

That is why nothing less than reining in the brigands of Wall Street will do.

Not to be reposted without the permission of Truthout.