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Financial Crisis
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Glass-Steagall Act
Unlike commercial banks and retail banks, investment banks do not take deposits.
From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a separation between investment banking and commercial banks.
Other industrialized countries, including G8 countries, have historically not maintained such a separation.
wikipedia
Back in the late 1990’s, in America at least, two schools of thought pushed for more financial deregulation – that is, for repealing the legal separation of investment banking from commercial banking, relaxing banks’ capital requirements, and encouraging more aggressive creation and use of derivatives.
If deregulation looks like such a bad idea now, why didn’t it then?
Confessions of a Financial Deregulator
Depression-era restrictions /Glass-Steagall/ on risk seemed less urgent,
given the US Federal Reserve’s proven ability to build firewalls between financial distress and aggregate demand.
New ways to borrow and to spread risk seemed to have little downside.
J. Bradford DeLong, project-syndicate.org, 2011
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The Sorrow and the Pity of Another Liquidity Trap
I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed.
Brad DeLong, Bloomberg 5 July
“I would be cheering for the return of the Glass-Steagall Act,”
John Bogle, founder of mutual fund giant Vanguard Group
CNBC March 2, 2010
The government should restrict bank actitivities far more than proposed under the so-called Volcker plan, which would prevent banks from investing for their own accounts, John Bogle, founder of mutual fund giant Vanguard Group, told CNBC
The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.
Since the Reagan years, free-market cliches have passed for sophisticated economic analysis.
But in the current crisis, these ideas are falling, one by one
E. J. Dionne Jr. Washington Post, July 11, 2008
You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."
The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview.
He noted that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules, "we let investment banks get into a much wider range of activities without regulation."
This helped create the subprime mortgage mess and the cascading calamity in banking.
This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled.
The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.
Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions.
What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.
What's striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad.
"You have to have the person who's writing the risk bearing the risk," he says. "That means a whole host of regulations. There's no way around that."
Banks with federally insured deposits, which are limited in the risks they’re allowed to take and the amount of leverage they can take on — have been pushed aside by unregulated financial players.
We were assured by the likes of Alan Greenspan that this was no problem: the market would enforce disciplined risk-taking
Paul Krugman 28/7 2008
Never again will the American taxpayer be held hostage by banks that are too big to fail,"
President Obama
BBC 22/1 2010
Mr Obama's proposals appear to be a return to the principles underlying the Glass-Steagall Act.
That law - from the 1930s in the aftermath of the Great Depression - separated commercial and investment banking and was eventually abolished in 1999 under President Bill Clinton.
Mr Clinton's financial secretary at the time, Robert Rubin, previously worked at Goldman Sachs and went on to be an adviser to Citigroup until last year.
The cause of our crises has not gone away
We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions.
John Kay FT January 5 2010
Senators John McCain and Maria Cantwell
Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative:
re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.
Bloomberg Dec. 28 2009
Those walls came down with passage of the Gramm-Leach-Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.’s acquisition of Merrill Lynch & Co.
In 1999, Gramm successfully undid the Depression-era Glass-Steagall Act, removing the decades-old wall between commercial banking, which was heavily regulated, and investment banking, which was not.
Republican presidential candidate Sen. John McCain's national campaign general co-chair was being paid by a Swiss bank to lobby Congress about the U.S. mortgage crisis at the same time he was advising McCain about his economic policy, federal records show.
"Countdown with Keith Olbermann" reported Tuesday night that lobbying disclosure forms, filed by the giant Swiss bank UBS, list McCain's campaign co-chair, former Texas Sen. Phil Gramm, as a lobbyist dealing specifically with legislation regarding the mortgage crisis as recently as Dec. 31, 2007.
Gramm joined the bank in 2002 and had registered as a lobbyist by 2004.
UBS filed paperwork deregistering Gramm on April 18 of this year. Gramm continues to serve as a UBS vice chairman.
http://www.huffingtonpost.com/2008/05/27/phil-gramm-mccain-co-chai_n_103801.html
McCain's chief economic adviser - and perhaps his closest political friend - is the ultimate pure play in free market faith, former Texas Senator Phil Gramm. If McCain follows Gramm's counsel, and most of his current positions are vintage Gramm indeed, his policies as president would represent not just a sharp departure from the Bush years, but an assault on government growth that Republicans have boasted about, but failed to achieve, for decades.
Since retiring from the Senate in 2002, Gramm - a former economics professor at Texas A&M - has been circling the globe as an investment banker at UBS (UBS). In July, McCain called on his old friend to salvage his floundering campaign.
http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm