In the 2016 Democratic Primary, one of the most contentious issues revolved around regulating the “Big Banks” and ensuring that Wall Street does not gain too much power and potency. Most notably, the U.S Banking Act of 1933 or Glass-Steagall Act was an extremely contentious issue between Senator Bernie Sanders and Secretary Hillary Clinton.
Context:
While the common commercial bank is thought of as the simple institution that takes deposits from those wishing to save money and utilizes those finances to use as loans, receiving most of their profit from interest, there are also other forms of banks. For example, investment banks act as consultants for companies and other entities along with raising revenue for said corporations. Additionally, various large financial firms not only act as commercial banks, but also participate in a wide variety of other activities including proprietary trading, market making, and derivatives.
Banks are protected by federal deposit insurance. Essentially, the Federal Deposit Insurance Corporation (FDIC), also created during the time of the Great Depression, insures commercial banks in order to protect the banking system in America and prevent its failure. Additionally, financial entities of all stature are able to take loans from the federal reserve and currently have taxpayer support through the Troubled Assets Relief Program of 2008. This led to a 700 billion dollar “bailout” of large financial conglomerates, however the Dodd-Frank Act lowered this to 450 billion dollars.
When passed, the law ensured that commercial banks did not also participate in investment banking simultaneously. It essentially prevents banks that engage in risky and dangerous activities from having the ability to rely on the taxpayers of America, they no longer are allowed to be supported by the FDIC.
History:
After the 1929 stock market crash which was followed by the Great Depression, many blamed banking activity as one of the main culprits. Specifically, over-speculation by banks and the fact that many were engaging in sloppy and risky activity hurt consumers greatly. While it may not have been the sole cause of financial crashes, it most certainly play a huge role.
Thus, two members of Congress - Congressman Henry Steagall and Senator Carter Glass cosponsored the bill where it was then signed by Franklin D. Roosevelt into a law. The act, while effective at first, soon lost its ability to separate commercial and investment banking. Banks and corporations found new loopholes and ways to get past the specified barriers that the act discussed and thus made the bill more ineffective.
Moreover, many economists and more specifically banks found that the bill was unproductive and actually hurt the United States economy. As greater calls developed against the act and many became certain that the law was already antiquated, Glass-Steagall was repealed in 1999 under President Bill Clinton.
Application Today:
After the 2008 banking crisis, many advocates for Wall Street regulation believed the catastrophe could have been avoided if Glass-Steagall was still in place. By stopping banks from engaging in risky behaviors, these economists said, many would not have failed and thus the crisis would have been avoided.
More specifically, Joseph Stiglitz, nobel prize winner of economics and professor at Columbia University, writes, “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.”
On the other hand, many still believe that Glass-Steagall is an un-needed and antiquated bill that shouldn’t be re-instated. Many still believe that it would lower economic productivity and was irrelevant during the 2008 crisis.
As we look to whether or not Glass-Steagall will be enacted in an updated form, an interesting point comes up. While President-elect Donald Trump fervently supports the bill, much of Congress still rallies against it. And so, it seems that Wall Street’s ability to gamble is up in the air for now.
Sources:
This is a well-researched post, and I think it contrasts nicely to your one about the Dodd-Frank Act. I think one of the most interesting aspects of Glass-Steagall is Trump's support for it and his support for repealing Dodd-Frank, which I suppose fits with his ideas about regulating Wall Street more but paradoxical to his own background. Since you've done the research, do you think that Dodd-Frank or Glass-Steagall is better?
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