Two recent developments have put real momentum behind a return to the full separation of commercial and investment banking that existed from 1933-1999 under the Glass Steagall Act; and the prospects of such a long-overdue divorce are moving forward both in the United States and the United Kingdom.
On July 4, the Financial Times published a lead editorial under the headline "Restoring Trust After Diamond," explicitly calling for the total separation of what in Britain are called retail and merchant banks. "The clash between retail and investment banking," the editors wrote, "has always been evident. What is now clear, however, is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together. The more herbivorous retail banking ethos--with its emphasis on patient stewardship--is marginalized. this seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal... While the FT supported those conclusions [of the Vickers Commission calling for partial separation of the banks--ed.] we are now ready to go further. For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall style line."
The Financial Times embrace of Glass Steagall came in the immediate aftermath of revalations that the British Banking Association, in league with 18 major banks and, perhaps, some officials of the Bank of England, had been rigging the London Interbank Overnight Rate (Libor) to facilitate insider trading on the derivatives market and other serious financial crimes. Three top officials of Barclays Bank were forced to resign, investigations are now underway in the UK, the United States and Switzerland, and the prospects of bankers being jailed over this scandal is looking more and more likely. The Libor rate determines more than $350 trillion in mortgage, credit card and other interest rates worldwide.
The second development that produced a flurry of calls for a return to Glass Steagall was the recent Brussels summit meeting of European heads of state, at which German Chancellor Merkel, French President Hollande, Italian Prime Minister Monti, Spanish Prime Minister Rajoy and others took the equivalent of a blood oath to preserve the euro single-currency system at all costs. Some more experienced bankers in London took this as a signal that continental Europe will be going through months, if not years, of financial turmoil and potential hyperinflation, that will likely spill over into the business of the City of London. For one thing, British banks have forged extremely close ties to some of the largest and most fragile Spanish banks, as their gateway into South America.
The Financial Times editorial was both preceeded and followed by a number of other strong statements for Glass Steagall coming from very senior voices in the City of London. Lord Paul Myners, a former Treasury official under Gordon Brown, a former publisher of the Guardian and Observer, and an affiliate of Lord Jacob Rothschild, gave an interview to Britain's Channel 4 TV, echoing the Financial Times. Paul Hambro, now a Russian gold trader, but a member of one of Britain's oldest merchant banking families, added his name to the chorus promoting the complete separation.
Expect these calls to resonate in the United States, where a bill is already in the House of Representatives, HR 1489, to restore Glass Steagall separation. The bill was introduced by Rep. Marcy Kaptur (D-Oh.) and now has 70 co-sponsors, including half a dozen Republicans, including several Tea Party Republicans. Thomas Hoenig, the former President of the Kansas City Federal Reserve Bank, and now the Vice Chairman of the FDIC, gave a recent interview to Bloomberg Radio, in which he made a powerful argument for Glass Steagall. Hoenig is widely respected among Main Street Republicans in the Congress.
The point is obvious: The European debt crisis is far from over, and the cries for new bailouts, coming from Spain and (soon) Italy will overwhelm the capacity of the European Central Bank and the not-yet ratified European Stability Mechanism (ESM) to meet the bailout demands. Spain is being forced to pay nearly 7 percent yields on ten year sovereign debt, Italy is not far behind, and Greece is still in a state of economic and political disintegration. The prospects for a European turn-around are grim, and the recent JPMorgan Chase losses on the derivatives market of European debt ($9 billion and rising) makes the obvious point that Wall Street is up to its eyeballs in the crisis across the Atlantic.
Glass Steagall will not solve all the problems, but it is a long-overdue first step towards at least protecting commercial banking from the wild leveraged gambling activities of the investment bankers and hedge fund managers, who were reckless because they believed that they would be bailed out by American and European taxpayers, no matter what they did. Harper
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If enacted in full, it is large enough to lift the US economy out of the zero-rate deflationary trap of the last decade and entirely reshape the social and financial landscape.
The stimulus will be corralled inside the closed US economy by Joe Biden’s protectionist “Buy America” policies, his industrial strategy, and his carbon border tax (i.e. disguised tariffs against China). This limits leakage.
It is a laboratory of sorts for a post-globalisation experiment in what used to be called “reflation in one country” – before the free flow of goods and capital emasculated sovereign governments.
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