NEP’s Bill Black appears on The Real News and says it’s important to reimplement the Glass-Steagall Act – but it’s not enough to prevent another financial crisis. You can view here with transcript or watch video below.
“Yves Smith,” the nom de guerre (and plume) of the finance expert who created and runs the invaluable blog Naked Capitalism, wrote an introduction to a piece roughly 18 months ago that mentions me. The points she made in that introduction, including the reason she invoked my name, are important but the lapse of time since she wrote it teaches us another important lesson. Here is the introduction.
“One of the things that Matt Stoller has stressed that the possibility of reform is remote until breaks within the elites take place.
Jeffrey Sachs, Columbia professor and director of the Earth Institute at Columbia, is a controversial figure for his neoliberal stance on macroeconomics and his role in promoting the use of ‘shock therapy’ in emerging economies. But it is also important to recognize that criticism from a connected, respected insider has more significance than that of someone like Bill Black, who has made a career of taking on bank fraud but has never reached a top policy-making level.”
On April 2, 2014, as news broke of the death of Charles Keating, the most infamous savings and loan fraud, I posted an article entitled “Ten Lessons We Must Learn from Charles Keating.” (The April 2 date was ironic, because it was the 27th anniversary of the meeting at which the senators who would become known as the “Keating Five” began to seek to intimidate the savings and loan regulators on Keating’s behalf.)
I failed to explain perhaps the most important lesson we should have learned from Keating and Lincoln Savings. One of the subtle aspects of the savings and loan debacle that is often overlooked is that we ran a real world test of the importance of the provisions of the 1933 Banking Act known as the Glass-Steagall Act. Glass-Steagall prohibited “commercial” banks that received federal deposit insurance (created by the same 1933 banking act) from owning equity positions in nearly all financial assets (“investment banking”). With very limited exceptions, a commercial bank could not own real estate, companies, or stock in companies. (Banking regulators, hostile to Glass-Steagall despite its immense success, would later add many exceptions.) The ideas behind Glass-Steagall’s separation of “banking” from “commerce” always made eminent sense from conservative and progressive perspectives. Commercial banks received a federal subsidy through deposit insurance, so it made no sense for them to be allowed to compete against regular businesses that lacked that subsidy. It would distort markets to allow such a subsidy.
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.