Why do so many people love Glass-Steagall?
Senator Bernie Sanders hit the presidential campaign trail in New York today, laying out his plans tackle income inequality, end “Too Big to Fail” and to reinstate the Glass-Steagall Act, which he mentioned by name roughly half a dozen times.
“Let’s not forget: President Franklin Roosevelt signed this bill into law precisely to prevent Wall Street speculators from causing another Great Depression,” Sanders said in his speech. “And it worked for more than five decades, until Wall Street watered it down under President Reagan and killed it under President Clinton.”
Glass-Steagall was part of the larger the Banking Act of 1933, which, among other things, separated banks’ commercial banking, investment banking and insurance businesses.
“The idea then — and there’s some validity to this now as well — is that if you’re mixing different kinds of activities, making it more complex, more opaque, it’s easier to make mistakes, it’s easier to behave badly, it’s easier to become very big,” said Simon Johnson, a professor at MIT’s Sloan School of Management.
Fast forward to the late 90s, Glass-Steagall was repealed amid a wave of deregulation, in part with the argument that it’d help banks be more profitable and better compete against bank abroad not subject to similar regulations.
“There was a general view among officials and the private sector in the United States that these 1930s restrictions and regulations were somehow holding back the U.S. financial sector, preventing firms from being ‘globally competitive,’” Johnson said.
But the idea of that there should be some type of firewall between custodian bankers and more entrepreneurial, risky Wall street types has persisted, said Lawrence Baxter, a professor at Duke Law School. Senators John McCain (R-Ariz) and Elizabeth Warren (D-Mass) have repeatedly introduced legislation to revive the act.
“The Glass-Steagall Act element that it keeps coming back, I think, it rests on deep belief that you shouldn’t mix these two types of cultures, especially if one of them is backed up by the taxpayer,” Baxter said.
The debate over reinstating Glass-Steagall often focuses on whether it would have helped prevent the recent financial crisis. Democratic candidate Hillary Clinton has said it would not.
Mark Calabria, director of financial regulation studies at the Cato Institute, agreed, saying that the crisis was caused by non-banks and financial institutions it wouldn’t have covered. He sees the idea of reinstating Glass-Steagall as distracting and a “misdirection.”
“Almost all activity banks engage in is risky,” he said. “There’s this artificial distinction that something going on on Wall Street is incredibly risky, where what commercial banks do is not risky. That’s just not true.”