Glass-Steagall

“Big, bad banks” — a “faux-populist” response

by Fran Smith on January 21, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation

Uh-oh.  It was speculation yesterday, but reality today - President Obama and the Democrats have the banking industry in their sights with their trigger fingers itching.  It’s their populist response to the “Massachusetts Miracle” election of Republican Scott Brown.  After reviewing the election results and polling numbers, they probably finally realized that “We the People” don’t want a cobbled-together, trillion-dollar health care plan rushed through Congress.  Nor do they want a cap-and-trade bill that will restrict energy use and jack up their energy costs.  Neither do they want more spend-and-tax schemes that leave them holding the bag.

Picture White House advisors plotting:  ”So what else makes People mad that we can use to get popular with the People again?” “Big, Bad Banks! Big, Bad Banks!” is the answer and is likely to be the Democrats’ populist slogan in this mid-term election year.

So President Obama today said that he will be cracking down on big banks and restricting their activities.  And , if they don’t turn over and play dead, he warned:

“If these folks want a fight, it’s a fight I’m ready to have.”

Congressman Scott Garrett (R-NJ) was right on target with his response to President Obama’s announcement.   Garrett attacked what he called Obama’s “faux populism” in jumping quickly – in the wake of the Massachusetts election — to paint the banks as the sole villains in the financial debacle, while ignoring Fannie Mae and Freddie Mac:

Garrett said in his press release:

“What is indisputable is that Fannie Mae and Freddie Mac were central to the mortgage market meltdown, which ignited the economic crisis that has left millions of Americans unemployed and has yet to be resolved. It is laughable that Chairman Frank and the Obama Administration have ignored their parasitic effect on our economy, yet proclaim the desire for reform. Passing strong GSE reform legislation should be at the top of the agenda of the House Financial Services Committee this year, in order to stabilize the mortgage market and alleviate risk to the taxpayer.  Any financial regulatory reform that does not reform Fannie Mae and Freddie Mac is not true reform.”

That’s a point that CEI’s John Berlau has long made.  In a statement today on President Obama’s announcement, Berlau pointed to the likely consequences of the President’s ill-conceived plans, which he termed “Glass-Steagall 2.0″:

What it would do is hurt economic recovery, reduce types of financing available to businesses big and small and give European and Asian financial services firms a huge competitive advantage over their U.S. counterparts.

“In short,” Berlau concluded, “The biggest systemic risk is that of hazardous government subsidies to and regulation on the financial sector.”

Obama’s Glass-Steagall 2.0 could crash financial system

by John Berlau on January 21, 2010

in Bailout Watch, Culture, Deregulate to Stimulate, Economy, International, Mobility, Politics as Usual, Precaution & Risk, Regulation, Trade, Zeitgeist

President Obama’s proposal today to bring back 1930s-like separation of commercial and investment banks, dubbed Glass-Steagall II or Glass-Steagall 2.0,  would do little to prevent the problem of financial institutions being too big to fail. What it would do is hurt economic recovery, reduce types  of financing available to businesses big and small and give European and Asian financial services firms a huge competitive advantage over their U.S. counterparts.

 

The president’s proposed regulation would leave U.S. banks, in the phrasing of American Enterprise Institute scholar and former Treasury Department official Peter Wallison, “too big to fail or succeed.” The proposal puts forth nothing to stop bailouts or modernize bankruptcy laws to make failure less systemic. Instead it reintroduces a Depression-era structure for banking used nowhere else in the world. And it does nothing to stop the size or systemic dangers of the government-created financial giants Fannie Mae and Freddie Mac that were at the center of the mortgage crisis.

 

Repeal of Glass-Steagall, which took place in 1999 with the Gramm-Leach-Bliley law that passed Congress overwhelmingly and signed by President Bill Clinton, had little to do with the mortgage meltdown at the center of our economic woes. Neither Bear Stearns nor Lehman Brothers were affiliated with commercial banks. Goldman Sachs and Morgan Stanley only became bank holding companies after they got into trouble. As for the commercial banks that imploded – such as IndyMac, Wachovia, and Washington Mutual – all went bust “by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm,” Wallison, who is also a member of the Financial Crisis Inquiry Commission, has noted.

 

In fact, the crisis may have been much worse had Glass-Steagall still been in place. As former President Clinton pointed out, Glass-Steagall repeal “has helped stabilize the current situation” by allowing mergers of commercial and investment banks, such as that of Bank of America and Merrill Lynch, to go “much smoother than it would have been” when the law mandated a strict separation.

 

What’s needed is updating of the bankruptcy laws for commercial banks, investment banks and combined operations, so that taxpayers are not holding the bag for any of them. Even before the bailouts, longstanding deposit insurance hazards engendered moral hazard by allowing depositors to chase the highest interest rate without inquiring at all to the safety and soundness of the bank.

 

Government entities and policies that encourage reckless lending, such as Fannie, Freddie, and the Community Reinvestment Act also need to be abolished or phased out.

 

Meanwhile healthy competition and innovation should be encouraged among all types of financial institutions to get credit to the entrepreneurs who will jumpstart our economy. Congress should raise limits on credit unions’ ability to engage in business lending. Community banks should be allowed to raise capital without going through the onerous accounting mandates of Sarbanes-Oxley, especially since they already go through stringent audits from bank examiners. And the Federal Deposit Insurance Corporation should lift the moratorium preventing retailers such as Wal-Mart, Home Depot, and units of Berkshire Hathaway form forming their own limited banking operations.

 

In short, the biggest systemic risk is that of hazardous government subsidies to and regulation on the financial sector.

 

 

 

 

Berlau on Air America today — debating deregulation on Thom Hartmann

by John Berlau on December 4, 2008 · 6 comments

in Bailout Watch, Coalitions & Outreach, Economy, Nanny State, Personal Liberty

Today at noon Eastern time, I will enter the lion’s den.

I will be live in the New York City studios of liberal network Air America having a friendly discussion about deregulation on The Thom Hartmann Program. Hartmann, author of books such as “”Screwed: The Undeclared War Against the Middle Class,” usually broadcasts form Oregon, and when I’m guest I have joined him by phone. But today, he’s broadcasting form the home office and I will be joining him live and in person.

Hartmann is tough but friendly, and the last couple times I’ve been on his show, we’ve actually sort of agreed on the issues. The civil libertarian in him and me both strongly objected to the mandatory fingerprint registry in this summer’s housing bill for a broad swath of the mortgage industry. We also both opposed the Wall Street bailout when it was before Congress this fall, though I think his main objection was the “Wall Street” part and mine was the “bailout” aspect.

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