Why The Glass-Steagall Myth Persists - (Here's your sign.)

[think]

Who agrees?

Why The Glass-Steagall Myth Persists

The Objectivist

We're members at the Ayn Rand Center, covering economics and liberty.

Yaron Brook and Don Watkins - NOV 12, 2012 @ 10:04 AM

The growth of government intervention over the last century was built on the back of a handful of myths. A generation ago, the dominant myth was that free markets had caused the Great Depression, a falsehood ultimately debunked by economists like Milton Friedman. Today, the key myth is that financial deregulation caused the 2008 financial crisis.

What deregulation? There aren’t many possibilities. Despite what we hear, regulation of the financial industry substantially increased over the last thirty years. Government spending on financial regulations, to take one measure, ballooned from $725 million in 1980 to $2.07 billion in 2007 (in 2000 dollars). Anyone looking to blame deregulation for the crisis faces slim pickings.

By far, the single most cited example of this financial “deregulation” is the Gramm-Leach-Bliley Act (GLB), which partially repealed the Glass-Steagall Act thirteen years ago today. Regulatory evangelists including Nobel Prize economist Joseph Stiglitz and recent senatorial candidate Elizabeth Warren, not to mention the Occupy Wall Street protesters, have named the overthrow of Glass-Steagall as public enemy number one.

Stiglitz, for instance, in a lengthy piece for Vanity Fair, could only muster two examples of the deregulation he thinks bears primary responsibility for the crisis: the repeal of Glass-Steagall and theSEC’s 2004 decision to raise banks’ debt-to-capital ratio from 12:1 to 30:1. The latter, of course was not deregulation, but re-regulation. For the regulatory evangelists, the repeal of Glass-Steagall is all they’ve got—and what they’ve got ain’t much.

~Snip~

Mr. Watkins and Dr. Brook are co-authors of Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government.

Read more if you like:
http://www.forbes.com/sites/objectivist/2012/11/12/why-the-glass-steagall-myth-persists/

Here's the portion of the article by Joseph Stiglitz that these Ayn Rand fans of the free market were referring to:

Capitalist Fools

By Joseph Stiglitz - JANUARY 2009

~snip~

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee.

I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

Source:
http://www.vanityfair.com/news/2009/01/stiglitz200901-2

[Recursion]

1. I agree with Elizabeth Warren that the impact of repealing Glass-Steagall was basically symbolic

The institutions it covered were not the institutions that collapsed, other than Citi, and Citi collapsed because of bad investments that were also legal under Glass-Steagall.

If the Ayn Rand acolytes are, for once, right about something, that doesn't make it wrong.

I agree with Sanders and O'Malley that it would be good to get it back; I disagree with Sanders that it's any sort of real priority.

[think]

3. Do you disagree with Stiglitz stating that the repeal made the too big to fail banks larger?

Do you feel the too big to fail banks operate in an ethical & moral fashion without routinely violating U.S. laws?



Statement from Stiglitz on too big to fail banks getting larger due to repeal of Glass Steagall:

Nobel Laureate Joseph Stiglitz on "Rewriting the Rules of the American Economy"

OCTOBER 27, 2015

AMY GOODMAN: Glass-Steagall?

JOSEPH STIGLITZ: Glass-Steagall is another important—

~Snip~

JOSEPH STIGLITZ: And the result of that was that we repealed Glass-Steagall. And what I was worried about precisely happened. We wound up with bigger banks that became too big to fail. The culture of risk taking, that’s associated with the investment bank, spread to the whole banking system, and so all the banks became speculators, actually lending to small businesses lower than it was before the crisis. And the kinds of conflicts of interest that were rampant in the years before the Great Depression started to appear all over the place in our financial sector.

AMY GOODMAN: So Bernie Sanders has called for the reinstatement of Glass-Steagall. Hillary Clinton has not.

JOSEPH STIGLITZ: Yeah, I hope that she will. But I think the fundamental issue here is, we have to tame the financial sector. And in our book, Rewriting the Rules, we describe how that can be done.

Full interview:
http://www.democracynow.org/2015/10/27/nobel_laureate_joseph_stiglitz_on_rewriting

[Recursion]

4. I do disagree with him. TBTF started back in the 1970s (nt)

[think]

6. Do TBTF banks operate ethically & morally without routinely violating U.S. laws?

[think]

7. So you're saying the repeal of Glass Steagall had no impact on TBTF banks getting larger?

The repeal of Glass Steagall legitimized this merger of banking and insurance companies:

Gramm–Leach–Bliley Act

A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998.[2] Less than a year later, GLBA was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank".[3]

Source:
https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act

[Recursion]

12. Yes, I am saying that (nt)

[Erich Bloodaxe BSN]

2. Word games.

...and theSEC’s 2004 decision to raise banks’ debt-to-capital ratio from 12:1 to 30:1. The latter, of course was not deregulation, but re-regulation.

To Randians, 'deregulation' simply means 'removing a regulation', and changes to regulations to make them more lax aren't 'deregulation'.

Someday, they might consider living in the same world as the rest of us.

[think]

5. The most glaring thing to me is the lack of discussion about the criminal behavior of these banks.

It would be one thing if these banks aren't routinely caught violating U.S. laws.

How many times does a banking enterprise get to break US laws including rigging markets
and defrauding customers before America decides it's time to break them up and make sure a law similar to Glass Steagall exists to limit risky behavior and potential criminal activities?

[Javaman]

14. the amusing part about libertarians is that they have no idea what life is live in a country without

regulations.

they think life, as it is now, is how it always was.

if there were a time machine, I would send them back to the Chicago stock yards circa 1901 and let them see life without regulations.

they are morons.

[Hortensis]

15. Always word games with them, trying to make their extremist

philosophy sound valid by restyling reality.

Their philosophy springs directly from personality limitations that allow them to FEEL personal freedom as the only truly important moral issue and to FEEL altruism only to themselves. Very different from the rest of humanity, whose heads are filled with many different duties to many people.

Libertarians not only would never risk their own lives to save a stranger and cannot imagine why anyone else would, but feel contempt for the many who are that dysfunctional. And they know only they are competent to direct our nation.

Thank goodness true, hard-wired libertarians are only about 12-13% of us.

[Octafish]

8. The two US politicians most responsible for its repeal now are on the payroll of UBS.

UBS hired former Sen. Phil Gramm as VICE CHAIRMAN. He brought in former President Bill Clinton. Later, UBS/Phil added George W Bush.

http://financialservicesinc.ubs.com/revitalizingamerica/SenatorPhilGramm.html

Since the repeal of Glass-Steagal, they've specialized in "Wealth Management."

What's in your wallet?

[think]

10. Thank you for the reminder that the politicians behind the repeal were rewarded handsomely.

The banks are all too willing to reward those that help them get laws changed.

[Doctor_J]

9. We'll soon know which DUers are Randians

Though I suspect we already know. And of course many of them call the liberals on the board "libertarians". Orwell was an optimist.

[think]

11. There have been plenty of posts echoing this sentiment. I doubt many of those posters will respond

here.

[el_bryanto]

13. Most serious reviews of the period do point to the Repeal of Glass Steagall

as a key point - but it's only one point. There is a whole buffet of shifts from the 1970s to the 2000s, including changing cultures on wall street, different compensation packages, new revenue streams and the like.

What is the purpose of Wall Street and the Investment Finance industry? If you are randian the only point to any business is to make money for it's investors, which strips out concerns about whether or not they are actually performing their function or not. To a randian a Baker who makes a delicious cake of flour, eggs, sugar and the like is just as good as a Baker who makes a lousy cake out of pencil shavings and beetle shells, so long as people buy the cake.

I'm not a randian myself, so it's worthwhile to look at what the point to the investment finance industry is, and to enact such regulations as prevent conflict of interest and harm to the public good. The point of the investment finance industry is to ensure that money gets from people who have excess to those who need it in the creation of new enterprises and expanding current enterprises. For accomplishing this, investment professionals, including investment banks, advisors and the like are entitled to turn a profit, but when the build their business on expanding that profit at the expense of their core function, there should be reprecussions.

Or that's my take.

Bryant