Tag Archives: Glass Stegal Act

Glass-Steagall separation on the table again

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Former Republican Presidential candidate John McCann and Democrat Elizabeth Warren have introduced a bill to reinstate the Glass-Steagall act which split investment and commercial banks. The reason for the repeal of the act 13 years ago was that financial services group wanted to offer a one-stop shop. Companies could access both syndicated loans and equity, individuals could buy insurance, mortgages, and stocks all in one place. However all this being said it was Lehman Brothers and Bear Stearns, who were purely investment banks, that brought the financial sector to its kness not financial supermarkets. This doesn’t consider the fact that both Citigroup and Bank of America owners of investment banks Soloman Smith Barney and Merrill Lynch respectively needed to be bailed out by the government. Also moral hazard was prevalent in that banks knew they were too big to fail therefore were encouraged to take more risks and where the rewards were greater but also the downsides. Over the last 10 years US banking has grown far more concentrated. In the mid-1990’s the biggest 5 banks accounted for about 13% of assets. By 2009 this was 38%.

If you look at the 7 decades since Glass-Steagall there were hardly any bank runs but more importantly growth was constant. Before the crash of 1929 bank runs were endemic but with public bank deposits not being able to be used for investment banking the problem was overcome. Whether anything will come of this bill to reinstate Glass-Steagall is doubtful as the financial services lobby group still remains very influential in Washington.

I blogged on this issue last year and used the metaphor of an oil tanker to explain how the split between investment and commercial banks works.
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To explain the root cause of the financial crisis George Soros uses an oil tanker as a metaphor. In the movie documentary “Inside Job” he basically said that markets are inherently unstable and there needs to be some sort of regulation along the way. The oil tanker has quite an vast frame and, in order to stop the movement of oil from making the tanker unstable, shipping manufacturers have designed them with approximately 8-12 compartments, depending on the size. This maintains the tanker’s stability in the water.

Tanker2

After the Deperession the Glass Stegal Act was passed in 1933. This act separated investment and commercial banking activities. At the time, “improper banking activity”, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors’ money. Therefore to use Soros’ metaphor, a compartment was put into the tanker to make it more stable.

Tanker1

However, in 1999 Gramm–Leach–Bliley Act effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. Therefore, the tanker had a compartment/s removed which made it very unstable and it eventually capsized. Consequently the deregulation of financial markets has led to the end of compartmentalisation.

US inequality on the increase

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I like this graphic from The Economist as not only does it display the significant increase in inequality but also the changes in economic systems that were prevalent during the time period. Notice after 1930 the drop in the income levels of the top 10% and 1% earners. This can be partly explained by a return to a more dominant role of government. However after 1980 we see the impact of Reagan and Thatcher and the policy of less government and deregulation. This was especially evident with the repeal of the Glass Steagal Act in the US and Big Bang in the City of London.

Some key statistics from The Economist:

The top 10% of American earners brought in 46% of the nation’s salary income in 2007.
2007 – 2009 the inflation-adjusted income of the bottom 99% dropped by 11.6
2007 – 2009 the inflation-adjusted income of the top 1% dropped by 36.3%

However since 2009:
Top 1% of earners income has increased by 11.6% – bailout packages and bonuses?
The other 99% of earners income has increased by just 0.2%.

Obama intends to tackle this problem with increasing the top marginal tax rate to 39.6% of the late 1990’s. Between 1932 and 1944 the tax rate on top incomes rose from 25% to 94%. I think there is little chance of that happening especially with the impending election.

US income gains since 1979

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Here is an interesting graph from Paul Solman of PBS. The top earners in the US have disproportionately been rewarded from the last 30 years of right wing free-market policies – starting in the early 1980’s with the ideologies of UK Prime Minister Margaret Thatcher and US President Ronald Reagan. However the significant increase from 2002 can in part be due to deregulation of financial markets and a very loose monetary policy by the US Fed. Also, in 1999 the Gramm–Leach–Bliley Act effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits – the Glass Stegal Act of 1933. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks.

Jeffrey Sachs on the OWS

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Dan Rather of HDNet interviews Professor Jeffrey Sachs of Columbia University about OWS. Sachs mentions that the OWS is not so much about the inequality of income but the irresponsibility and illegallity of the banking sector. Moreover how they brought down the financial system in such a reprehensible way. He also talks of the Glass Stegal Act and how we need to look after the average american. In the Depression Franklin Roosevelt said that we are not going to allow speculation of Wall Street ruin the economy and this led to the Securities Exchange Commission (SEC) being established as well as the Glass Stegal Act. After the deregulation in the 1990’s it was basically “off to the races”

Financial Crisis – an oil tanker without compartments

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To explain the root cause of the financial crisis George Soros uses an oil tanker as a metaphor. In the movie documentary “Inside Job” he basically said that markets are inherently unstable and there needs to be some sort of regulation along the way. The oil tanker has quite an vast frame and, in order to stop the movement of oil from making the tanker unstable, shipping manufacturers have designed them with approximately 8-12 compartments, depending on the size. This maintains the tanker’s stabilty in the water.

After the Deperession the Glass Stegal Act was passed in 1933. This act separated investment and commercial banking activities. At the time, “improper banking activity”, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors’ money. Therefore to use Soros’ metaphor, a compartment was put into the tanker to make it more stable.

However, in 1999 Gramm–Leach–Bliley Act effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. Therefore, the tanker had a compartment/s removed which made it very unstable and it eventually capsized. Consequently the deregulation of financial markets has led to the end of compartmentalisation.