The GOP Wants to Repeat This YUGE Mistake of the Great Depression
In a section of the recently released 2016 Republican Platform titled “Regulation: The Quiet Tyranny,” the Party of Lincoln endorses re-imposing a regulation that would impact trillions of dollars’ worth of assets.
“We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment” state the document’s supposedly capitalist drafters, who ironically castigate President Obama for “regulating to death a free market economy that he does not like and does not understand.”
You can’t make this stuff up.
The part of Glass-Steagall to which the authors are referring concerns the ability for banks to provide both commercial and investment banking operations under the same roof. Prior to the passage of the then-President Bill Clinton-supported Gramm-Leach-Bliley Act (GLBA) of 1999, such combinations were largely verboten.
In the wake of the financial crisis and recession of 2007-2009, in a classic case of beginning with a narrative and looking for any points, no matter how tenuous, to back it up, Democrats contended that deregulation namely in the form of GLBA caused banks to take risks that crashed the financial system.
What commercial banks combining with investment banks had to do with a massive, government-fueled bubble in the housing sector, Glass-Steagall proponents have trouble explaining.
Republicans apparently have bought into the Democrat’s narrative and insist that it is their right to determine what risks are appropriate for banks to take, and restructure industries wholesale by government fiat.
When judging a piece of legislation like Glass-Steagall, it pays to look at what motivated the bill’s drafters to implement it in the first place.
The Heritage Foundation’s resident financial regulations guru Norbert J. Michel outlines this history in a piece that the Republican Platform authors appear to have ignored:
Glass–Steagall has attained near mythical status for securing a vital separation between commercial and investment banking in the U.S. Supposedly, this separation put an end to the risky financial activities that contributed to the Great Depression. Yet, the record shows that separating commercial and investment banking was little more than a long-time pet project of Senator Carter Glass, one of the original authors of the Federal Reserve Act of 1913. Glass viewed securities investments as a purely speculative activity and in virtually no way a legitimate commercial endeavor. Consequently, he believed that the only way to ensure bank safety was to restrict bank lending to short-term financing of commercial activity.
One reason this idea is flawed is that there was no general prohibition—before or after Glass–Steagall—against commercial banks providing operating loans to investment banks. That is, the firms engaged in the very speculative activity Glass abhorred regularly borrowed from commercial banks.[33] Regardless, the record shows that Glass had no empirical evidence to support his opinion. The definitive historical study of Glass-Steagall shows that “the evidence from the pre-Glass-Steagall period is totally inconsistent with the belief that banks’ securities activities or investments caused them to fail or caused the financial system to collapse.” In fact, the evidence suggests that pre-Glass–Steagall banks engaged in securities activities were safer than those exclusively engaged in commercial banking.
In light of the facts and evidence, and given the other nominally pro-free market designs in the Republican platform in paying lip service to sound money, abolishing Dodd-Frank and ending Too Big to Fail, the insertion of a line about reinstating Glass-Steagall is somewhat baffling. If Republicans even vaguely understand that the best constraint on banks like all other businesses is a market that punishes them for destroying value and rewards them for creating it – rather than socializing losses and privatizing profits – than why might they have included such an incongruent clause?
The cynic might point to some good old-fashioned extortion. Could it be that Republicans are in effect threatening existing business models in the financial services industry in order to entice bankers, traders and executives to pay for the privilege of not having to break up their businesses – that is, contributing to Republican candidates in order to sway them to swear off the reinstatement of Glass-Steagall?
While follow-the-money analysis is often fruitful, in this case such a rationale would seem inapt at first glance, given that members of the finance, insurance and real estate industries have contributed disproportionately to the GOP during the 2012 through 2016 election cycles.
Take a closer look at the numbers however, and you will note that Republican presidential nominee Donald Trump is not even in the top 20 recipients during the 2016 cycle from the “killers” on Wall Street, among others in the industry. In fact, according to Open Secrets, he is being outraised by Hillary Clinton at a rate of 49:1, with Clinton hauling $15.6 million thus far to Trump’s paltry ~$318,000.
There are any number of reasons why Wall Street might loathe Donald Trump, including a belief that Hillary Clinton can and will be bought off to protect its interests, while Trump is likely to spurn those with whom he has had contentious business dealings over the years.
Seen in this light, if Trump will never gain the financial service industry’s support, reinstatement of Glass-Steagall makes sense politically in keeping with his populist pose as a means of perhaps garnering the votes of Independents.
Whatever the rationale, Republicans should focus less on breaking up banks, and more on creating a free marketplace whereby financial institutions rise and fall of their own volition, and market participants determine appropriate levels of risk and price it accordingly. (For more from the author of “The GOP Wants to Repeat This YUGE Mistake of the Great Depression” please click HERE)
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