Conservatives and Libertarians should Support the Return of Glass-Steagall

By William K. Black
(Cross posted at Benzinga.com)

Glass-Steagall prevented a classic conflict of interest that we know frequently arises in the real world.  Commercial banks are subsidized through federal deposit insurance.  Most economists support providing deposit insurance to commercial banks for relatively smaller depositors.  I am not aware of any economists who support federal “deposit” insurance for the customers of investment banks or the creditors of non-financial businesses.

It violates core principles of conservatism and libertarianism to extend the federal subsidy provided to commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations.  Absent Glass-Steagall, banks could purchase anything from an aluminum company to a fast food franchise and (indirectly) fund its acquisitions and operations with federally-subsidized deposits.  If you run an independent aluminum company or fast food franchise do you want to have to compete with a federally-subsidized rival?

Deposit insurance is a material federal subsidy, but it pales in comparison to the implicit federal subsidy we provide to systemically dangerous institutions (SDIs) (so-called “too big to fail” banks).  The SDIs are precisely the banks most likely to purchase non-commercial banks.  The general creditors of SDIs are protected against all loss so they funds to SDIs at a substantially lower interest rate than smaller competitors.  The largest SDIs are commercial banks that get both the explicit subsidy of federal deposit insurance and the larger subsidy unique to SDIs.

No conservative or libertarian should want the SDIs to maintain their political and economic dominance.  The SDIs’ dominance comes about not due to their efficiency but their size and the size of their lobbying wallet and force that allows them to extort greater federal subsidies than their rivals.  If conservatives and libertarians have any uncertainty about their position on Glass-Steagall they should consider these facts: (1) President Obama opposes ending the SDIs, (2) has done nothing effective to end the large federal subsidy provided to the SDIs, and (3) opposes bringing back Glass-Steagall and removing the explicit federal subsidy to banks that indirectly provides a competitive advantage to their commercial affiliates.

 

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack

 

 

4 Responses to Conservatives and Libertarians should Support the Return of Glass-Steagall

  1. charles fasola

    Mr. Black,

    I’m not going to argue the fact that Glass-Steagall is a positive in that it protected customer deposits from being utilized for speculation and other dangerous, fraudulent activities. However, am I mistaken in my assessment that AIG and Lehman were not banks? Could it have stopped the control fraud and other criminal behavior which took place before and caused the crisis of 2oo7/2008? These activities were taking place before the crisis and previous to elimination of GS; were they not? Bringing GS back to life won’t do a thing to prevent the FIRE sectors bribing and capturing of all three branches of government. Until that reality is effectively eliminated, all of the laws and regulations in the universe will not change our present situation. Presently, government won’t be our saviors.

  2. Didn’t he campaign on ending big bank bs? Big O that is. Broke so many promises at this point, it’s completely expected anyway. ANYWAYS, when it comes to Wall St, R/D is meaningless, it’s how much campaign $$ a particular legislator gets that determines their vote for the most part. In addition to compromises and re-election prospects. And blackmail. And who the f*ck knows what else. Anybody have a take on the chances of this getting thru? I haven’t been following Congress much lately. My walls can’t take any more of my head beating against em.

  3. The core problem is inbreeding, beyond that it is a failure to see the difference in factional policy goals at the top. Old fashioned Vanilla Greed For Profit vs Pernicious Greed for Destruction and Control.

    http://www.boxthefox.com/

    Deception is the strongest political force on the planet.

  4. “Deception is the strongest political force on the planet”

    Only i would say propaganda, which, of course, basically IS deception. Anyways, very perceptive and well said.