Why Reviving Glass-Steagall Won’t Stop Megabanks from Destroying the Economy AGAIN

Senators Elizabeth Warren and John McCain have revived a bill to reinstate the Glass-Steagall Act, which would mandate the ostensible protection offered by a clear partition between commercial and investment banks.

Enacted in 1933 after the crash of 1929, Glass-Steagall was partially repealed in 1999 by the Gramm-Leach-Bliley Act (GLB)—which led to the persistent perception that GLB caused the financial crisis of 2008-2009. As Greece faces grinding austerity and China’s markets crumble, Glass-Steagall seems to be the prudent, logical course—or does it?

Traditional banks insured by the Federal Deposit Insurance Corporation (FDIC) that allow deposits and grant loans would be prohibited from riskier investment practices like derivatives speculation, hedge funds, and the like. Any affiliation of traditional banks with companies that engage in high-risk investment would likewise be forbidden under the 21st Century Glass-Steagall Act.

“Despite the progress we’ve made since 2008, the biggest banks continue to threaten our economy,” explained Warren in a statement. “The biggest banks are collectively much larger than they were before the crisis, and they continue to engage in dangerous practices that could once again crash our economy.”

According to Public Citizen, Glass-Steagall’s broad support not only includes “numerous scholars and bankers,” but has also garnered the favorable attention of several high-profile figures. In addition to Warren and McCain, Senators Angus King and Maria Cantwell are co-sponsoring the proposed legislation. Over 700,000 citizens’ signatures calling for the return of regulation are indicative of extensive public approval. Presidential candidates Bernie Sanders and Martin O’Malley also support a return to more cautious banking, but perhaps most noteworthy in the list of prominent supporters are John Reed and Sanford Weill—the creators of Citigroup.

“These veteran bankers understand from experience that mixing these businesses defied prudent management,” noted Bartlett Naylor, financial policy advocate for the Congress Watch division of Public Citizen.

Though advocates tend to view regulatory reinstatement akin to a panacea, the bill’s own fact sheet cautions it, alone, will not end “Too Big to Fail” banks. What it can do is move “the financial institutions in the right direction by making them smaller and safer.” These downsized banks “will not be able to rely on federal depository insurance as a safety-net for their high-risk activities. Although some financial institutions might be large, they would no longer be intertwined with depository banks, reducing the implicit government guarantee of bailout.”

Impassioned pleas to reapply Glass-Steagall’s regulated dividing line have been ongoing since the market took a nosedive in 2008—matched every step of the way by vociferous opposition.

On November 12, 2012—the exact date of the thirteenth anniversary of the GLB’s repeal of Glass-Steagall—Forbes published a scathing critique of bank regulation proponents. Though emphatically pro-capitalist from beginning to end, the op-ed contains several crucial points that necessitate consideration. It states:

“There is zero evidence [that GLB] unleashed the financial crisis. If you tally the institutions that ran into severe problems in 2008-09, the list includes Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and Fannie Mae and Freddie Mac, none of which would have come under Glass-Steagall’s restrictions. Even President Obama has recently recognized that ‘there is not evidence that having Glass-Steagall in place would somehow change the dynamic.”

The article explains that FDIC-insured, traditional banks were not affected in the collapse by any stipulations that Glass-Steagall would have otherwise prevented, adding that “[t]heir problems arose from investments in residential mortgages and residential mortgage-backed securities—investments they had always been free to engage in. GLB didn’t cause the financial crisis . . . “

With this factual context—and considering the overwhelming desire to rein in fear with a quick fix—21st Century Glass-Steagall might as well be the garden hose attempting to put out a three-alarm fire.

As usual, the government is offering the comfort of a familiar name—instead of an actual solution ahead of possible disaster.

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