More on the Glass-Steagall Act by Hank Foresman

Carter Glass was a conservative, in the Burkean and Madisonian sense; Henry Steagall was a southern rural Democrat; and like many from the South his politics was populists in that he wished to protect the common man from the power of corporations, banks, and railroads.  Together they help enact one of the most important Banking laws of the 20^th Century the Glass-Steagall Act.  While there were a number of provisions in the Glass-Steagall Act its most important functions were, as stated in Wikipedia:

The Banking Act of 1933 (Pub.L. 73-66, 48 Stat. 162, enacted June 16, 1933) was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and imposed banking reforms, several of which were intended to control speculation.  Specifically It was intended to erect a barrier between the activities of commercial banks and investment banks.

Carter Glass born in 1860, his early years were shaped by the cycles of boom and bust in reconstruction South.  Booms and bust cycles that tore families’ asunder, booms and bust that left scars on countless communities across the South, to include his hometown, Lynchburg Virginia.  As a result of his own experience and his observations Glass believe there was a proper role for government in controlling the excess of capitalism. 

We must understand that Glass’ conservatism was very different that what passes for conservative thought today.  He, like Edmund Burke and James Madison understood there was a need for government involvement in commerce; involvement to ensure a level playing field, involvement to protect the little guy from the inherent venality of those with power.  Burke, Madison, and Glass would find appealing the nihilistic philosophy of Ayn Rand that seems to penetrate for what now passes as conservative thinking.

Glass and Steagall both had seen the destruction which unchecked speculation by banks with the money of their depositors had wrought on the South.  One of the major portions of the Glass-Steagall was the creation of the Federal Deposit Insurance Corporation in order to protect depositors from having their life saving wiped out by the stupidity of the bankers.

Erecting barriers, protecting depositors, regulating and preventing bankers from doing what they too often have done through history—chase bright shiny objects in hopes of elusive larger profits.  I had a very wise great uncle, George P. Foresman, who was a small town bank President in Southeastern Ohio for over fifty years.  His father fortune had been wiped out in the 1880s because of his father speculation in horse racing, and because the bank where his money was deposited went under.  Uncle George and my Grandfather went from middle class to poor overnight.  As a result Uncle George was conservative, prudent, and frugal with not only his money but also the money of those whose money was deposited in his bank in Circleville Ohio.  For the fifty years he was the President of that bank, his bank survived depression and recessions and prospered.  About a year before he died I asked Uncle George what the cause of the Great Depression was, he thought for moment, rocked back on his heels, and said, “Henry, on the whole bankers are stupid.”

The Glass-Steagall Act was designed to protect against stupid bankers.  As recent events have shown there are plenty of stupid bankers out there.  Bringing back the Glass-Steagall Act is a proper first step in ensuring our economy is stable.  History has proven the wisdom of the Glass-Steagall Act and the prophetic statement of my Great Uncle George.  Let’s not repeat history.

 

Comments

[Townie76]

venality of those with power.  Burke, Madison, and Glass would find appealing the nihilistic philosophy of Ayn Rand that seems to penetrate for what now passes as conservative thinking.

My bad that should be appaling not appealing.

[Alba Etie]

The desire to protect ourselves from stupid bankers should be a nonpartisan no brainer .

[William R. Cumming]

Banksters outsmarted by the hedgeters and rocket science slicky boys. Investment vehicles few can understand and perhaps none can. Still the basics of the banking business erode daily due to the growing likelyhood that those with some funds that need more and can pay back will go directly through the communications revolution and get in touch with each other and not even need a local branch bank. The modern corporation seldom uses the banking system to move its commercial paper but it does have many nonbank bank options to do the job.

The premise of all is that governments do not default. That is a laugh and even the USA has defaulted in many ways in the past. Making the dollar worthless is a starting point.

[Harry]

The problem isnt stupid bankers. The problem is clever bankers.

To make money in a bank, you need to lend money at a higher rate than you borrow it. To make more money you need to do more of this - expand your balance sheet. For a banker the benefits of balance sheet expansion accrue to the banker. The costs - increased risk and potential collapse and failure - accrue to the public purse.

Your problem in bringing back Glass Steagall is that it would be adverse to the material interests of bankers or people who own interests in banks. It would inevitably result in the price of banking stocks declining. Eliminating a public subsidy often has that effect. The people who own large amounts of bank securities are often very substantial contributors to politicians. I would expect fierce opposition.

Bringing back Glass-Steagall would be a sensible thing to do. How often do you see a sensible thing happen?

[turcopolier]

Harry

What you say is true but not universally true. I bank at and own stock in a small (1.5 billion) privately held local bank that is 160 years old and in much the same hands over that time. They believe in moderation in all things. They do not behave in the way you describe, but, how many are there like that? pl

[Harry]

You are right. I am over-generalising.

[Bill H]

Col, Credit Unions are like that. They are non-profits by definition, and depositors are actually shareholders. Since the motive of their operation is not profit, they tend not to fall prey to the greed that causes failure. That doesn't mean that bad management does not occur and their lending policies can be overly lax because they are lending to their shareholders.

I'm with Harry that stupidity on Wall Street is not the problem. These guys knew precisely what would happen, but they also knew that they themselves would walk out of the rubble not only intact but enormously wealthy.

[turcopolier]

BillH

My bank is a privately held commercial virginia bank. It is not a credit union. pl

[chairman miao]

In general I agree with this post: bring back Glass-Steagall!!

Here's an issue I have been wondering about, though. I wonder if we (American society) don't have a problem of too much capital. I am (vaguely) thinking that a current problem is that there are not enough productive investments available in the USA any more: in part this is globalization, and in part this is the sloshing around of the greatest accumulation of capital the world has ever seen. So the owners of all this surplus capital want large returns, and this has led us to the pressures for unregulated casino-style banking.

This is just a hypothesis, feel free to tear it to shreds.

Another bank issue which scares me to death is credit default swaps. I'm increasingly convinced that the governments are going to have to declare CDS instruments null and void: otherwise, EVERY financial institution and country becomes Too Big To Fail, and the regulators can't even mitigate because no one knows where the CDS bombs are held.

[JurisV]

Harry

My godmother used to say there are serious differences between "smart", "clever", and "stupid."

A person could be smart or stupid without being clever, but some people could be either smart or stupid and still be clever. The stupid-clever person, she warned, was the one to avoid like the plague. They leave carnage in their wake!

She was skeptical about cleverness in general. When she referred to someone as "clever" it was not a compliment.

[JurisV]

I stupidity is, I believe a partial problem, but the real problem with the management is ignorance and hubris. They don't have a clue on the risk that they have been taking on in an attempt to increase their returns. Their value at risk (VaR) models are a seductive illusion. As many astute analysts have said, the problem is the "tail risk" of the probability distribution. There's no way that any of them really understand what they're betting on.

Then again, I have no problem if they do all that casino type stuff and call it investing -- if they use their own money so that if they make a bad bet they lose serious money! Government should not be backstopping these types of financial excess.

[Walrus]

Harrys idea that banks make money by "Lending money at a higher rate than you borrow it" is a quaint artifact of Twentieth century banking. It doesn't work that way any more folks. Banks now make money by charging fees to gamblers. This is driven by a number of "Sophisticated Investment practices" that need to have a stake driven through their heart:

1(a). Banks now operate on a "fee for service" business model by which Banks have no actual interest (apart from some "blue sky" - their costs and profit margins are covered by their fees) in the outcome of the deal.

1(b). This business model is supported by a bonus driven staff remuneration framework that encourages the creation of dishonest, cut throat, corrupt and plain illegal deal structures by its employees. The rewards for this behavior are riches beyond the dreams of avarice.

1(c). To be successful in this industry requires (i) Very high intelligence. (ii) A complete lack of scruples and empathy. (iii) Highly developed back stabbing skills. (iv) Inside information. (v) hard work.

Make no mistake, the net result of these practices is not, as Harrys comment might suggest, the pooling and investment of patient capital in prudently managed productive enterprise, but the creation of toxic deals where both lenders and borrowers lose and only the bank wins. I cannot overempahsize this = this is the desired bankers outcome.

This is what created the housing bubble. The banks not only made their fees out of both lenders and borrowers - they securitised the resulting mortgages and then sold them to a Third party - but then bet against the toxic securities they had just created!!!!!! "Moral hazard" doesn't even begin to describe it.

Not only that and CDS, CDO, high speed trading, algorithm trading, but these MFS are dreaming up new hobgoblins while we sleep. A charming guy I know has just spent a few years building a business case for resurrecting Tontines! I also recently noted the offer to unsuspecting consumers of a "variable rate" credit card that operates on something like the ARM mortgage model. All we need now is to make debt transmissible for parent to child and the road to serfdom is again open.

It's not just Glass Steagall that needs to be reinstated. There needs to be a set of prudential controls reinstated to ensure that no bank ever again has the chance to try and end run around Government by claiming they are "too big to be allowed to fail". Furthermore, certain financial behaviors need to be criminalised. I particularly like the Chinese punishment for financial crime - a bullet behind the ear.

Sorry for the rant, having spent too much time dealing with these animals in the venture capital and related financial industries, I'm now allergic to them, and the avoidance of having to interact with any more of these bastards, especially socially, is driving my house hunting activities and lifestyle choices.

[scott s.]

Historically commercial banking was considered a separate business from investment banking, and commercial bankers were strictly admonished from loaning long (typical product 90 day bills). Well, except for gov't debt as financier Jay Cooke and Sec Tres Salmon Chase developed national banking as a vehicle to absorb civil war debt. The size of the civil war debt required in addition recourse to Wall Street investment houses as well as London and other European houses. The coming of transcontinental railroads created a new demand for long term investment in RR bonds, and as the country began to prosper after the civil war became a vehicle for speculation as new money sought a return. Cooke fancied himself a railroader (Northern Pacific) but his investments in RR bonds resulted in a liquidity squeeze that put him out (and as fall out he lost his national banks as well) and the panic of 72. Same thing repeated in the panic of 93. Meanwhile the "trust" form of corporate governance was created as a means of combining commercial and investment banking. Even then we still had "savings" banks, until the S&L crisis, and we see some of the same problems there as with investment banking.

[Alba Etie]

Col Lang
My one true love , thirty year a paralegal -wife; the day BOA announced the Executive Bonuses in spite of the public out cry-she went and got mad . That day my wife took one vacation day to transfer everything we had from BOA to a local credit union . We have not regretted one moment that decision. I havetheir at our credit union my small one man & a van business account -and the credit union accomdates me well when I need to purchase vehicles etc. Also they call by name there-and the coffe is always fresh in the lobby even late in the day . When I asked one of the elected by the membership Board Members what if anything Dodd Frank would do to effect the credit unions ability to compete - he said it would help all of the members . And without asking he also stated that a robust Glass Stegall Act needed to back on the books - and that would really help us.
And should you mention BOA to my wife - be prepared for at least an out burst of unkind expletives - she is very much a lady until you steal her money. Yes BOA will still get her Irish up- she truly can be a hard arse from rural New Mexico.
To paraphrase some of my progressive/ leftist pals " Think globally - bank locally ..."

[Mark Gaughan]

ALCON,
"Bringing back the Glass-Steagall Act is a proper first step in ensuring our economy is stable."
Here, here!
Mark

[Tyler]

Glass steagal is not coming back. The powers that be are a bit too entrenched for that.

Instead bring back the pitchfork, the torches, and the rope. I guess you can call me old fashioned as well, hah.

[optimax]

Here's a quote from Paul Craig Roberts at Counterpunch:

"It is ironic that the outcome of financial deregulation in the US is the opposite of what its free market advocates promised. In place of highly competitive financial firms that live or die by their wits alone without government intervention, we have unprecedented financial concentration. Massive banks, “too big to fail,” now send their multi-trillion dollar losses to Washington to be paid by heavily indebted US taxpayers whose real incomes have not risen in 20 years. The banksters take home fortunes in annual bonuses for their success in socializing the “free market” banks’ losses and privatizing profits to the point of not even paying income taxes."

http://www.counterpunch.org/2012/05/21/bet-on-collapse/

Why aren't the evanjelicals calling for a Jubilee and the end of usury? Brainwashed sheeple.

[Bill H]

I wasn't suggesting otherwise, Col. My phrasing was awkward, implying that only credit unions operate like that. I should have said that credit unions also operate like that. So, of course, do small, privately owned banks.

[r whitman]

One of the visions of the revocation of the Glass-Stegall Act was the concept of the consumer financial supermarket.

It was supposed to be like this: Walk into a bank building, see one area for checking and savings, another for SD boxes, another for insurance, still another for stocks and bonds. Also areas for all kinds of loans. This concept was never put in place where I live (Texas).

Sears and Roebuck tried to do something similar at their big stores in the 80's with their Allstate Insurance and a stock broker that they acquired. They has kiosks in the stores. The insurance part was sucessful, I do not think the brokerage was.

[William R. Cumming]

The spin war has started on the FACEBOOK IPO debacle. Some now estimate major adverse impacts on the American economy and I suggest it will impact the 2012 election adversely to the President's re-election efforts. Could be wrong as always.