Bring Back Glass-Steagall

The Federal Reserve HDQ -- needs to be a Glass house -- Picture courtesy of Wikipedia

by blogSpotter
Barack Obama and our Democratic congress are doing a great deal toward pushing an economic stimulus package. This is a good move -- a tried-and-true Keynesian tonic (called "pump-priming") used in the 1930's. Some people are under the wrong impression that it took the logistical wheels of WWII to get us out of the Depression; noted economist Paul Krugman points out that the Roosevelt programs such as WPA were slow to give stimulus but were finally doing their magic by the end of the 1930's. Government has to step in as the consumer, if no one else will.

What I would now find appalling (given our new Depression) is granting $800 billion to known thieves (basically) while making no requirement toward a change in behavior. Giving AIG or Wells Fargo a bail-out with no behavioral therapy attached would be like giving paraldehyde and a sermonette to a bad alcoholic. The behaviors we witnessed in the last nine years border on criminal (and sometimes as in the Madoff, case cross that line handily). We CANNOT give the henhouse back over to the foxes that already raided it once – it would compound the theft and financial vandalism already committed. My own thought is that we should bring back the 1933 Glass-Steagall (GS) act in some form or fashion.

What is the GS Act? It’s depression era legislation enacted by two Congressional Democrats at the most desperate low-point of 1933. The main accomplishment of GS was to separate commercial banking from investment banking, yielding two great advantages: (1) Preventing conflicts of interest that accompany a single entity that both lends and uses credit. And (2) Encouraging safe and conservative investment policies for Depository institutions whose primary purpose is to preserve the value of customers’ deposits. It should be noted that other countries adopted this same financial firewall from our example (most notably China), and reap the benefits even now.

Unfortunately, in the Internet Boom of the Go-Go 90’s, the Congressional Democrats allowed Republican free market proselytizers to talk them into going along with a repeal. The arguments were along these lines: "We’re losing market share to foreign companies that don’t have the restriction.” (We by the way refers to rich people, not you or me -- the money market investor). "Conflicts of interest could be managed by making the commercial and investment arms of the same company be separate subsidiaries" (And that helps how?). It’s now thought that repeal of GS led to our current bad situation. It’s to the everlasting shame of gung-ho Clinton Democrats that they went along with Phil Gramm on the repeal of such an important system safe-guard.

With all that is being spent, and all the gnashing of our teeth, it would be great to see that we’ve been restored to a nation of of laws. People are only human and the greed motive is ever-present – we need to structure our institutions so that peoples' greedy natures are met with other peoples' common sense and desire for self-preservation.

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