There is often some confusion about Glass-Steagall. Two separate laws were passed, and both received the label. In 1932, the Glass Steagall Act was passed and gave the Federal Reserve Board more ability to protect banking clients in the eventuality of default.
The Banking Act of 1933 is also referred to as the ‘Glass-Steagall Act,’ and is often the one referred to when discussions about banking practices occur. The law mandated the separation of commercial banking from investment banking. It also forbade the union of commercial banks and securities firms. The last of the provisions were repealed in 1999 by the Gramm–Leach–Bliley Act, (GLBA). A bipartisan group of senators have proposed new legislation which would prohibit commercial banks from participating in speculative trading. Congress must pass this legislation.
A resurgence of the philosophy of Glass-Steagall is believed by many economists as the only solution to cease the risky and ill-advised policies of Wall Street.
After the 1929 crash on Wall Street, congress was intent on the prevention of any re-occurrence of the near destruction of the country’s economy.
The idea was to create two types of banks, and neither could use the funds from the other.
The first was a regular commercial type of institution. This is what most Americans think of as a bank. Consumers have checking and savings accounts in these. They also lend money to their customers such as a mortgage on a home. Because of the necessity to secure the funds of customers in these type of institutions, they established the FDIC.
The other type presented more risks. Investment banks were free to invest in any enterprise they deemed advantageous to the economic growth of the company. They did not take deposits, they issued bonds or borrowed money in other ways to make their investments.
With the repeal of part of Glass-Steagall, banking institutions have been able to use all of their assets in any manner they choose.
Because customers have their funds protected by the federal government, some efforts have been made to re-establish a form of the 1933 act. But the rules have been re-written so frequently, they have lost their teeth.
Those in congress who are seeking new and tougher laws need only to point out that several of our nation’s largest banks would not exist today if the government had not bailed them out in 2008-2009.
This is simply another situation of doing the right thing for the American people. There is no downside.
Banks complain that it would be difficult for them to split their companies. There is no truth in that argument. Banks continually sell off divisions with no disruption in their day to day business.
When President Clinton signed the bill that repealed the Glass-Steagall Act in 1999, he made it easy for the industry to engage in risky and questionable business practices. Greed saw them make unwise investments including the issuance of thousands of sub-prime loans, eventually resulting in the crash of the housing market.
Some definitive and rigid form of Glass-Steagall much be passed by congress.
Alfred James reporting