The vital importance of restoring the Glass-Steagall Act
Editor
An article published by economist and former deputy Treasury secretary Dr Paul Craig Roberts on his blogsite [1] and in OpEdNews [2] entitled “Without Glass-Steagall, America will Fall” has made the point that the alarming growth of economic inequality within the U.S. is a direct consequence of the demolition (in 1999 under the Clinton administration) of the Glass-Steagall Act. This very important U.S. legislation, originally co- sponsored by Sen. Carter Glass (D,Va) and Rep. Henry B. Steagall (D, Ala), is otherwise known as the U.S. Banking Act 1933. It was signed into effect by President Franklin Roosevelt in June 1933, and was designed for the specific purpose of separating commercial banking from investment banking. It also created the Federal Deposit Insurance Corporation, among other things. According to Roberts:
For 66 years the Glass-Steagall Act reduced the risks in the U.S. banking system. Eight years after the Act was repealed, the banking system blew up, threatening the international economy. The U.S. Treasury was forced to come up with $750 billion dollars, a sum much larger than the Pentagon’s budget, in order to bail out the banks. This huge sum was insufficient to do the job. The Federal Reserve also had to step in and expand its balance sheet by $4 trillion in order to protect the solvency of banks declared ‘too big to fail’.President Roosevelt affixing his signature to the Glass-Steagall bank reform bill in 1933. CreditBettmann/Corbis
“The enormous increase in the supply of dollars known as Quantitative Easing inflated financial asset prices instead of the consumer price index. This rise in bond and stock prices is a major cause of the worsening income and wealth distribution in the United States. The economic polarization has undercut the image and reality of the U.S. as a land of opportunity and has introduced political and economic instability into the life of the country.
“These are huge costs and are being paid for the benefit only of the rich who were already rich. ”
According to Roberts, the repeal of Glass-Steagall has turned a somewhat egalitarian democracy with a large middle class into a society sometimes described as the One Percent vs. the 99 percent, and has destroyed the image of the U.S. as an open and prosperous society.
The population at large is well aware of the nation’s economic decline, and this awareness was manifested in voting trends at the last presidential election. The population also knows that the reported U.S. Bureau of Labor Statistics (BLS) figure of 4.3% for the unemployment rate, as well as the alleged abundance of new jobs, are fake news. The BLS gets the low rate of unemployment by not counting the millions of discouraged workers who cannot find employment. If you haven’t looked for a job in the last 4 weeks, you are not consider- ed to be unemployed. The birth/death model, a purely theoretical construct, accounts for a large percentage of the non-existent new jobs. The jobs are there by assumption, but are not really there. And there has been an immense replacement of full time jobs with part time jobs. Commensurate with this transition to part time employment, the health care and pension benefits that were once a substantial part of employees’ pay packages are being terminated.
Those with a good understanding of the mechanics of banking realise that it makes perfect sense to fully separate commercial from investment banking. The government insured deposits of commercial banking should not serve as backing for investment banking’s creation of risky financial instruments, such as subprime and other derivatives. The U.S. government during the time of Roosevelt understood that reality, but it appears that the government during the time of Clinton apparently did not. This deterioration in government competence has cost the U.S. dearly. Here is what Roberts says:
“By merging commercial banking with investment banking, the repeal of Glass-Steagall greatly increased the capability of the banking system to create risky financial instruments for which backing from the public purse was available. So, we have an extraordinary situation in which the repeal of Glass-Steagall effectively forced the 99 percent to bail out the One Percent.
The repeal of the Glass-Steagall Act has turned the United States into an unstable economic, political, and social system. We have a situation in which millions of Americans have lost full time employment with benefits to jobs off-shoring, and in which their lower income employment in part time and contract employment leaves them no discretionary income after payment of interest and fees to the financial system (insurance on home and car, health insurance, credit card interest, car payment interest, student loan interest, home mortgage interest, bank charges for insufficient minimum balance, etc.
Thus they are on the hook for bailing out financial institutions that make foolish and risky investments.
None of what Roberts had described would be politically viable unless Congress and the President intended to resign and turn over the governance of the U.S. to Wall Street and the Big Banks. A growing crescendo of voices are saying that this effectively has already happened. So, can anything be said to remain of democracy when the One Percent can cover their losses at the expense of the 99 Percent, which is what the repeal of Glass-Steagall guarantees? Roberts stresses the vital importance of restoring Glass-Steagall type legislation, and continues:
“Not only must Glass-Steagall be restored, but also the large banks must be reduced in size. That any corporation could be too big to be allowed to fail is a contradiction of the justification of capitalism. Capitalism’s justification is that corporations who misuse resources and make big losses should go out of business, thus releasing the misused resources to those who can use them profitably. Capitalism is supposed to benefit society, not be dependent on society for bailing it out.
“I was present when the former CEO and Chairman of Chase Manhattan Bank, George Champion, testified before the Senate Banking Committee against national branch banking.
“Champion said that it would result in the banks becoming too large and that the branches would suck savings out of local communities for investment in traded financial assets. Consequently, local communities would be faced with a dearth of loanable funds, and local businesses would die or not be born from lack of loanable funds.
I covered the story for Business Week. But despite the facts as laid out by the preeminent banker of our time, the palms had been greased, and the folly proceeded.
“As Assistant Secretary of the US Treasury in the Reagan Administration, I opposed all financial deregulation. Financial deregulation does nothing but open the gates to fraud and sharp dealing. It allows one institution, even one individual, to make a fortune by wrecking the lives of millions.
“The American public is not sufficiently sophisticated to understand these matters, but they know when they are hurting. Moreover few in the House and Senate possess sufficient sophistication to understand these matters, but they do know that to gain an understanding of them is not conducive to having their palms greased. So how do the elected representatives manage to represent those who vote them into office?
“The answer is that they seldom do. The question before Congress today is whether they will take the country down for the sake of campaign contributions and cushy jobs if they lose their seat, or by contrast will take personal risks in order to save the country. ”
The reality is that no society can survive in the long run if dangerously excessive risks and financial fraud can be bailed out by the government via the public purse. Moreover any effort to reduce the financial risks arising from the inter- mixing of commercial and investment banking by requiring stronger capital positions of financial corporations will be largely futile. Dealing with the 2007- 08 financial crisis required Treasury and Fed payments which greatly exceeded any realistic capital and liquidity requirements for financial institutions. Without a re-enactment Glass-Steagall type legislation, the risks currently being taken – which are all driven by financial greed – will lead to the complete economic destruction of the U.S. and other countries around the world.
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