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July 27, 2013


Now that Senator Elizabeth Warren (with bipartisan co-sponsorship of Senator John McCain – hardly a raving liberal) have filed a bill that would force big Wall Street banks to split their commercial banking and investment banking operations, the Wall Street flacks and apologists are out in force to defeat the bill. The bill contains key provisions of the old (1933) Glass-Steagall Act which were aimed at banking excesses of the Roaring Twenties, excesses which strongly helped cause the Great Depression.

The Glass-Steagall Act set up a wall of separation between commercial and investment banking, and with some ups and downs in business cycles afterwards, worked well until 2008, which ushered in the Great Recession (an economic downturn that is systemic and not cyclical, in my opinion). The Great Recession happened because Clinton (on the advice of Greenspan, Rubin and Larry Summers) signed a repeal of Glass-Steagall some nine years before the Great Recession very nearly caused an international financial collapse in his biggest mistake of his eight-year tenure as president. I need not write of the catastrophic results of recession, bailouts, TARP etc. We all know about the EFFECTS of the Great Recession; I am focusing on its CAUSES, and one of the important causes of the Great Recession was and is the absence of Glass-Steagall. Senators Warren and McCain rightly wish to rectify Clinton’s mistake.

So now that a Democratic senator and a Republican senator have the intestinal fortitude to co-sponsor a bill reinstating the key provisions of Glass-Steagall which provide for a separation of commercial and investment banking, which worked so well for 66 years in a relatively tranquil economic climate before Clinton’s signature on the repeal of this great legislative act, a signature which set the stage for the Great Recession of 2008, the usual suspects are out on the PR circuit in force. Who are the usual suspects? It’s the same old group – flacks and apologists for the big Wall Street banks, hedge funds, private investment groups, venture capitalists, unlisted companies and various other shadowy vulture capitalist groups representing huge pools of capital and leveraging access to even more.

Their spokespeople are pushing the traditional buttons of “don’t regulate me” on TV business channels and print journalism, though they forget to mention the Great Recession they caused and the bailouts they sucked up in the 2008 meltdown. Their putdowns of the Warren-McCain bill range from “The bill has virtually no chance of passing,” to “The real solution isn’t stricter regulation – it’s to stop regulating banks altogether. Maybe then we’ll get what we’ve always wanted in terms of bank size, risk profile, innovation, and everything else that free markets always deliver without fail.” So they are telling us to give it up – from “the bill has no chance of passing” to the caveman defense of “the free markets never fail to deliver” (when we saw how the “free market” delivered in 1929 and 2008). Such libertarian myths have no historical support. If there was ever an industry that required regulation, it’s the financial sector (private and publicly listed banks and other financial institutions and capital aggregations as well as any other pool of capital where public exposure to loss or impact on our economy is or may be involved).

One of their spokespeople for their untouchable John Wayne frontier capitalism here in 2013 had an interesting observation at Matthew C. Klein, after stating that “This legislation would achieve nothing and is based on the myth that combining commercial and investment banking caused the financial crisis, and that future crises can be warded off by enforcing a hard separation between boring banking and dangerous banking,” he in a slip of the pen (or keyboard) wrote “That it would be more effective to insist that banks have enough equity to cover all their bets.” He is wrong about what caused the Great Recession – it is not a myth – but he is right to admit (to my shock) that banks should have sufficient reserves to cover their “bets.”

He is right about big banks’ having to have sufficient reserves to cover their losses (as a big Wall Street bank did in a recent six-billion dollar loss in trading credit derivatives). No bailouts were required to assure that bank’s solvency; the shareholders took the hit, and how they treated their executives as a result is of no concern to the rest of us since we had no skin in that game. Without reinstatement of Glass-Steagall’s key provisions of reestablishment of a wall between commercial and investment banking AND regulatory requirements of adequate reserves to cover Wall Street’s crapshoots, we remain at risk for Great Recession #2 (or worse) – AND THAT’S NO MYTH.

John Authers in the Financial Times had a more measured and correct view of the impact of the repeal of Glass-Steagall in 1999. He noted that “Since the original Glass-Steagall Act was repealed in 1999, Financial supermarkets such as Citigroup and Bank of America swelled to unmanageable sizes after repeal, and contributed to awful errors in risk management.” He also wrote that “Repealing the law also cause the too big to fail problem” because before the original Glass-Steagall Act was repealed, the five biggest banks accounted for just 13 percent of assets; by 2009, that number was at 38 percent.” (My note – It is far more now – in 2013.) He further noted that “Laws like Glass-Steagall helped the U.S. avoid the over-concentration and over-banking that made European banks too large for their governments to rescue, and finally observed that “Without Glass-Steagall, the one-stop shops knew they were too big to fail, encouraging risk taking,” and that it is “too bad the chances are so slim that this bill will pass.”

I think Authers is right in every observation he made, but I sure hope he is wrong in predicting that chances are slim that this bill will pass. In spite of the enormous pressure of Wall Street propaganda flacks (and campaign contributions), I think it is time for members of our congress to overcome their always-dry campaign contributions trough syndrome and vote for America. This is not a political issue; it is an apolitical housekeeping measure (as proven by co-sponsorship), and one whose significance cannot be overstated when you consider that our survival as a viable nation-state is (literally) up for grabs.

Any fair-minded citizen who knows and understands anything of economic history can see that our economy is owned and controlled by Wall Street and the rich and corporate class, and that either we regulate their out-of-control conduct and size, or they will totally own and control not just our economy, but, in a fashion reminiscent of 1984, us. Whether we are totally owned and controlled by government (as in 1984), or by the corporate culture (now looming), control is control, and in the final analysis, our democracy is at stake in this money v. people struggle. It doesn’t have to be that way.

If we reinstate Glass-Steagall and other regulatory constraints such as the Volcker Rule on big banks too big to fail, we will be sending an appropriate and indeed necessary message to them and other such out-of-control parties in the financial sector that the picnic is over, that this economy and our democracy belong to all the people, that our blood-bought democratic freedoms are not for sale to pools of capital, however organized, or anyone else. We desperately need a reestablished Glass-Steagall Act.  GERALD  E

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