Do you believe the Glass-Steagall Act ought to be reinstated?
- Yes (83%, 82 Votes)
- No (17%, 17 Votes)
Total Voters: 99
If a Great White insisted he only ate seafood, would you throw your children in the water with him? Probably not, which is why we are scratching our heads at Sanford I. Weill’s recent statement on CNBC that the basic tenets of the Depression-era Glass-Steagall Act ought to be reinstituted.
Glass-Steagall was a key piece of financial reform in the wake of the stock market crash that precipitated the Great Depression. Prior to 1933, banks holding money from depositors (their fundamental role in our society) were allowed to use those deposits to speculate in financial markets for their own profit. In other words, financial institutions were getting rich by gambling with Joe Mainstreet’s paycheck.
After the U.S. economy fell to pieces beginning in 1929, citizens and regulators alike thought it prudent to limit the ability of banks to gamble with customer deposits. Thus Glass-Steagall was born. It functioned as the financial version of the separation of church and state for the following 30 to 40 years, depending on which economist you ask. After a prolonged period of sustained economic growth in the U.S., the hallowed separation of deposits from bets began to erode, all in the name of bigger, better and faster wealth creation. Of course, that wealth never seemed to make its way back to the depositors as interest paid on deposits have declined in an almost straight line since 1980, the turning point in this epic banking (de)regulation drama.
In the aftermath of the 2008 financial crisis, a renewed interest in Glass-Steagall has bloomed. Social, political and economic theorists have been singing the praises of the now antiquated act ever since Citigroup was forced to accept a $45 billion dollar taxpayer-funded bailout. But we have yet to hear the words “Glass-Steagall” uttered in deference by any big banker — that is, until now.
Sanford I. Weill, the former CEO of Citigroup and self-styled “Glass-Steagall Shatterer,” has gone on record stating that investment banks and retail banks ought to be split up once again, Glass-Steagall style. While not going so far as to admit wrongdoing over the span of his entire career, Weill has stated that the Glass-Steagall model may not have been appropriate for the banking industry prior to 2008, but that it is necessary now.
first tuesday take
Utterly confounding, isn’t it? We can’t figure out why the number one exploiter of banking deregulation would come out now and advocate Depression-era financial reform. Is it because he’s already satiated his seemingly unquenchable appetite for profiting on the backs of his depositors? Or is it because he’s retired now, and finally fit to unburden himself of heretofore-inconvenient truths?
We’re not sure, but one thing is certain — he’s right. Separating investment banks from retail banks, along with paring back lenders’ ability to originate and distribute mortgage loans on the mortgage-backed bond (MBB) market, would both go a long way in stabilizing the real estate market and the greater economy.
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It is all about balancing risk. Lenders must assume a greater share of the risk in proportion to the benefits they receive. The most effective way of correcting the abhorrent risk asymmetries between lenders and borrowers is to require lenders to have more skin in the game relative to their depositors. This will lead to less speculation and mitigate the possibility of more taxpayer-funded bailouts.
Of course, it will also enervate lender profit grabbing — the primary reason why Glass-Steagall was stunted in the first place and why the Volcker Rule now languishes under the strong arm of big bank lobbyists. Regardless of why Weill has come out with this shocking statement, we are happy to hear somebody on Wall Street speak some sense. Perhaps this is the dawning of a new age in the financial industry. Please, humor our optimism.
re: “Weill Calls for Splitting Up Big Banks” from the New York Times