Glass-Steagall, Take 2 (Jan. 13)

Mike & Co. —

Spoiler alert that the update below is another (requested) look at financial regulatory debate.  It might not seem like territory as friendly as, say, gun control and it’s close the Vermont Senator’s home turf of economic inequality but his advantage can be neutralized. 

Back to taxes tomorrow. 




The tangle in the Democratic primary over financial regulation ran over into a second week this week.  It is not quite a tangle on a specific issue between the two leading candidates as much as a proxy struggle between the campaigns and the commentariat, both trying to put the debate into the larger perspective of broad policy questions and themes.

The candidates’ recent exchanges haven’t grappled fully with the issues at contest while allowing Sen. Sanders to continue focusing on his so-far successful populist rhetoric.   His advantage here is bound to erode if the debate becomes any more substantive for a variety of reasons.


The US Banking Act of 1933, better known as Glass-Steagall, has been near the center of economic political discussions for decades.  The act was introduced in 1933 to separate the activities of commercial and investment banking, elemental in the New Deal effort to end one Great Depression and prevent others.    By the 1960s, the lines started blurring between commercial and investment banking activities as regulators began to allow commercial banks to undertake more securities activities.  There were so many allowances that many believe the Act was de facto dead by the time it was repealed in 1999.

The substantive policy issue most in contention is the centrality of the 1999 repeal of the Act to the recession.  This is a fine place for it if you are looking for ways to trip a candidate up on the arcane business of commercial bank functions, their relatively incidental role in the recession, and the limits of Glass-Steagall (a vulnerability of his which I will happily expand upon in an update for those interested in the policy blow-by-blow).

Political Viability

The Sanders’ plan hinges on passing a new Glass-Steagall Act to permanently separate commercial and investment banking and then, importantly, breaking up the largest banks (he includes non-banks like AIG and Bear Sterns in this)within one year of taking office.

What’s the professional commentary on Sanders’ plan to use Dodd-Frank section 121 to break up banks within one year?  One neutral analyst:  “unrealistic … since you would probably need to replace Janet Yellen with someone who’s on board with this project, and her term won’t expire until early 2018.”

These considerations overshadow for the moment the practical political reality that most of the specific proposals being debated are unlikely to gain traction in the next Congress given the near certainty that the GOP will retain control of the House.

But there is plenty at stake here and HRC has won probably the most important vote in this still muted and recondite debate. Barney Frank:  “There was this inaccurate argument out there that she’s been weak on the subject… I don’t know what that’s based on, other than the fact she represented New York.”  Getting Barney Frank’s support is big and should be more ballyhooed.  But getting a small and ready stable of media savvy and intellectually able validators is not always easy.

The majority of rank-and-file Democratic primary voters may appreciate Sen. Sanders’ obvious sincerity and passion on the issue.  He is relying on it; it is perhaps the central issue of his campaign.  But HRC’s approach to regulation is no less thoughtful, certainly more detailed, and probably more systemically sound.  Moreover, it matters to voters who will have to work with at least half a Republican Congress.  And the Clinton plan is at least more viable than that of Sen. Sanders.

Neutralizing the Advantage

Not that creating a roadmap of guaranteed legislative victories is HRC’s plan.  The plan instead is to have a creditable rejoinder to Sen. Sanders’ financial reform  proposals and to do so with ideas that blunt the semi-informed populist rhetoric and win the support of progressives and independents.  And to do it systemically — HRC’s dozens of proposals focus on be priorities for improvement and reach into every corner of the sector.

Sen. Sanders believes that the main cause of the financial crisis was the lack of Glass-Steagall, that had Glass-Steagall still been in place, the crisis would not have occurred.  This minority perspective is subject to challenge.  Few economic crises are the result of one single factor.  Even Sen. Elizabeth Warren agrees that the crisis probably could not have been avoided if Glass-Steagall had been in place.  Prevailing opinion even within the progressive commentariat agrees.  And In any event, the view disregards the large role that “shadow banking” had in causing the crisis independent of the depository banks.

Pressing the Advantage

The New York Fed says that “[shadow] banking activities consist of credit, maturity, and liquidity transformation that take place without direct and explicit access to public sources” of liquidity and credit backstops — the Federal Reserve’s discount window and the FDIC’s insurance on bank deposits.  The shadow banks take greater risks than their traditional counterparts, and they’re doing so with no public protections.  This was true during the Glass-Steagall era as well.

Analysts of all stripes worry that that breaking up the largest banks or even passing a new Glass-Steagall Act would simply cause these activities to migrate elsewhere.  After all, shadow banking arose during the time of the first Glass-Steagall, what’s to stop it from surviving the advent of its successor?   Meanwhile, adding or tightening margin requirements on short-term “repo” lending, leverage requirements on broker-dealers, transparency on hedge funds, and revisiting the money market fund industry are the repairs to the sector’s critical inter-institutional links needed to secure it.

Voters are legitimately concerned about the security of their jobs and future taxpayer-supported bailouts.  If the debate’s focus shifts from resurrecting a long-dead Act to finding new, innovative and systemic solutions instead, and it is connected directly with anger about Wall Street bailouts or middle-class fears about being ripped off by the system, the ideas will resonate more deeply.  The new proposed provisions of Dodd-Frank work better for modern banking and the modern economy than the ideas presented in Glass-Steagall over 80 years ago.



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