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History Repeating Itself? A revival of the Glass Steagall Act

Flickr Upload on September 24, 2008 by ttstam

A healthy private banking system is the grease that allows the wheels of business and employment to multiply in our economy. You may not realize it, but if your nations banking system is not healthy, then it is guaranteed that it will be harder for you, and your family to: buy a home, obtain a loan to start a new business, acquire a loan to fix your home’s roof, to buy a new car, or most importantly to find meaningful hourly employment. The most prosperous, and vibrant economies have: a high savings rate, a trade surplus, with a current account surplus that follows from that, low consumer and government debts, as well as a healthy banking system.

The United States economy, citizenry, and government in almost 41 years, has digressed from having all of those ingredients I just mentioned, to now in 2010 having none of the ingredients needed for a prosperous and vibrant economy for all of its citizens. The US banking system, was the last of these 6 key requirements of a vibrant economy to fall, began to publicly fail in late 2008 with the beginning of the ‘banking bailouts’.

This article will look at a few of the keys decisions made by Congress & the President, one in 1933, that was key to preserving post World War 2 prosperity for the citizens of the United States, and how the post ‘Glass-Steagalls’ “Universal Banking System” is the same banking structure that weakened pre World War One, and pre World War Two Germany.

The Glass-Steagall Act (aka: The Banking Act of 1933), was passed by Congress in response to failing of a large swath of the commercial banking system in the United States in early 1933. This bill brought forth the idea of separating banks according to the primary services they provide. For instance “Commercial Banks”, for smaller loans to citizen consumers, also these banks were for citizens to sign up, and use savings, and checking accounts for personal use. This bill also brought forth the idea of “Investment Banking”, being completely separate from the commercial banks mentioned earlier.

The following is a brief, and accurate summary of the banking conditions that forced the banking crisis in the early 1930’s that lead to the economic climate, that brought forth the Glass Steagall Act. This is courtesy of the Congressional Research Service (which is a part of the Library of Congress):

“In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.”

From the time of Glass-Steagall’s passage in 1933, through to the 1970’s, the US banking system stayed relatively sound and stable, thanks to this separating of “commercial” and “investment” banking. However following the election of Ronald Reagan, with his belief in “liaise fair” government, where the ideal is minimal government intervention in both personal, and business freedoms, the push began growing stronger to begin chipping away, and eventually removing the “firewalls’ separating “investment” and “commercial” banking services, and institutions.

By the George H.W. Bush Presidency of 1989 to 1992, reports were commissioned, to study a possible return to what is referred to as the: “German Universal Banking System”. In a report from 1993 entitled: “The German Banking System: The System of the Future” it defines the: “German Universal Banking System as possessing these powers:

“The universal banking system in Germany allows banks to offer a variety of financial services to their. customers, such as the taking of deposits, consumer and commercial lending, securities underwriting and trading, mutual fund operations, and investment advising.”

This “Universal Banking System” structure was how the banking system was structured in Germany in the build up to World War I, and World War II, with Germany being the primary aggressor in those wars. Is it only a coincidence that our banking system is failing presently in the United States, in a similar fashion to the German banks preceding both World War I, and World War II?

Some statistics from the Federal Deposit Insurance Corporation (FDIC), which not only is the agency that insures bank deposits up to a specific amount, but also keeps statistics on US banks. Here are some sobering statistics on bank failures in the United States since 2008. In 2008 there were 24 US bank failures, in 2009 there were: 139 US bank failures, a 480 percent increase from 2008, and in 2010 there as of May of this year there have been: 73 US bank failures, which averages out to: 14.6 failures /month; with at that current pace the yearly projection for bank failures for 2010 is 175, which is a 26 percent increase from 2009.

Some of the benefits that Glass-Steagall offered, in terms of protecting United States citizens, and the greater economy included:
Eliminating destructive “conflicts of interest” that arise from a commercial bank lending to the investment arm of itself, which led to abuses by the banks, and their investment subsidiaries.
In order for “healthy competition” and a free market of lending institutions to serve the publics needs, the size of these banks must kept undersized in order to prevent monopolies and conflicts of interest which endanger the citizen depositor, and the health of the greater US economy.

Senator Maria Cantwell of Washington state said it well commenting on the bill now in congressional “reconciliation” where the contentious aspects of each bill are limited to 20 hours of debate. She had this to say about the merits of the: “Restoring American Financial Stability Act of 2010”:

“While this bill takes much needed steps to help prevent a crisis of this magnitude from ever happening again, it fails to close the very same loopholes in derivatives trading that led to the biggest economic implosion since the Great Depression…. Throughout this debate I have fought hard against efforts to weaken this legislation as well as to pass language to strengthen it further. But the fact of the matter is, without key reforms in derivatives trading, this bill does not safeguard America’s economy from a repeat of this crisis.”

“It sets up a process for responding the next time we have a financial crisis, but it doesn’t prevent this kind of thing from ever happening again. We have to stop these kinds of dangerous activities. We need stronger bans on banks gambling with depositors’ money. We need bright lines – like  Glass-Steagall – that separate risky activities from the traditional banking system. We need to refocus our financial system away from synthetic bets and get more capital into the hands of job creators and Main Street businesses. There are good, strong provisions in this bill, and I’m proud of the work we did to get them in there, but I fear that without closing the loopholes primarily responsible for this economic meltdown, we are missing the entire heart of the matter.”

In conclusion, unless “Glass Steagall” is brought back, it will be much harder for the United States economy to climb out of the forty foot ditch that it is in.

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73 2010 US bank failures 14.6 f/m; yearly projection for bank failures for 2010: 175, 26 percent increase from 2009 est.

139 2009 US bank failures, a 480 percent increase from 2008

24 2008 US bank failures 

Sources:

“Glass-Steagall Act” summary and highlights of the bill: http://www.cftech.com/BrainBank/SPECIALREPORTS/GlassSteagall.html#anchor852185

“Glass-Steagall Act” http://en.wikipedia.org/wiki/Glass–Steagall_Act

“FDIC’s Failed Banks List”. http://www.fdic.gov/bank/individual/failed/banklist.html

The German Banking System: “The system of the Future”. Pg: 105-6. http://www.jura.uni-frankfurt.de/ifawz1/baums/Bilder_und_Daten/Arbeitspapiere/paper7.pdf

Senator Maria Cantwell commenting on the: “Restoring American Financial Stability Act of 2010”. http://georgewashington2.blogspot.com/2010/05/senate-passes-faux-financial-reform.html

May 26, 2010 Posted by FreeBreakingNews.org | Ecomonics | Banking Act of 1933, banking system, Commercial Banks, Glass Steagall Act, Investment Banking, Library of Congress, private banking, the Great Depression, United States economy | Leave a Comment