CANDIDATES NEED TO UNDERSTAND, “GLASS-STEAGALL” IS NOT THE ANSWER

…Wall Street is once again back in the news.

 

Some candidates are showing their ignorance about US financial issues.

 

This week on Morning Joe, a statement was made that these first weeks of 2016 of Wall Street’s performance are the worst ever in the famed financial market’s history.  Trillions of dollars are being lost in trading over these weeks.

 

Most of this loss is due to the problems going on with China’s currency devaluation, the record low price of a barrel of crude oil and US stocks riding a six-year bull market with prices long overdue for a correction.

 

But as expected, this activity has brought back memories of 2008 and many investors are on the edge of calling their stock brokers saying, ‘Get me out of there!’ Per Chris Bertelsen, chief investment officer at Global Financial Private Capital: “There was pent-up sell emotion over the weekend, particularly from individual investors.,”

 

With all these terrible memories being brought back by this Wall Street activity, there has also been a resurgence of the calls to, “Bring back the Glass-Steagall Act!” which was repealed back in 1999.

 

So first, I have to ask if you know what the Glass-Steagall Act was and what was its purpose?

 

Answer: Glass-Steagall was a Depression-era law that restricted the kinds of activities US banks could engage in.

 

After the Great Depression, the securities banking business was considered too risky for federally insured regular commercial banks to engage in, or to have the same ownership. As a result, the law said these two kinds of banks couldn’t be owned by the same holding company.

 

The issue today is that Glass-Steagall would not have kept the financial disaster of 2008 from happening. Why some of the presidential candidates are pushing to bring back Glass-Steagall only shows that they don’t really understand what bringing back Glass-Steagall actually could achieve.  The real answer is, not very much.

 

First, let’s look at what happened in 2008.

 

The reality is, Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley (the main problems) were basically stand-alone investment banks, not commercial banks. So Glass-Steagall would not have affected these companies that got into big trouble.  The troubled AIG was an insurance company. Fannie Mae and Freddie Mac were government-sponsored entities that bought mortgages. Washington Mutual was just a traditional savings-and-loan. So again, Glass-Steagall would have done mostly nothing here.

 

The politician’s ignorance of Glass-Steagall does not bode well for their knowledge of the nation’s financial circumstances.

 

But what can be done to keep the 2008 disaster from repeating?

 

During the housing bubble, banks gave out terrible, bad mortgage loans where the risks were papered over and were offered through misleading marketing.  The banking regulators also didn’t have a good sense of where all those risks lay and how interconnected they were.

 

That’s mainly because, so much risk was concentrated in the “shadow banking” sector.  These are those financial institutions that aren’t commercial banks such as Lehman Brothers, and they historically haven’t been as closely supervised.

 

When Dodd-Frank was passed in 2010, it addressed some of these concerns. It created a council to monitor risk throughout the entire financial sector, including at shadow banks. But the law doesn’t go nearly far enough to regulate what the $14 trillion “shadow banking sector” can do, or under what conditions are required to minimize the havoc it can wreak on the rest of the economy.

 

The Republican have no idea for what to do as all they want is to repeal Dodd-Frank and turn the banks loose once again like in 2008.  Bernie Sanders wants to use a sledgehammer and break up all the big banks while Hillary has a plan to make Dodd-Frank stronger.

 

Hillary has offered proposals aimed at increasing the financial organizations accountability, such as bigger rewards for whistleblowers. She would impose a graduated “risk fee” on the banks.  This wouldn’t break them up, but would discourage them from getting too big.  But if they insisted on being big, it would keep them from taking too many risks. However, of most importance, she has laid out specific plans for more oversight of the “shadow banking sector”.

 

Unfortunately, her plan is very boring to explain and cannot be described in a sound bite like “Break Up the Banks”.

 

The point of all this is, Glass-Steagall was not the answer in 2008, and it’s not the answer today.  But there are serious ways being offered to keep the last financial disaster from repeating.

 

Copyright G.Ater   2016