John McCain, and a few other folks on Capitol Hill have recently introduced a bill designed to bring back Glass-Steagall. OK…. so what?
Since way back in 2008, when we first started to realize what was really going on with the financial sector, there have been rumblings of bringing back Glass-Steagal. Back in the 1990s, it was technically against the law for a bank to also do investments and insurance. A bank could be a bank. An investment company could do investments. And an insurance company sold insurance. There was some, but very little overlap.
The 3 types of financial services companies didn’t really like this. During good times everyone invested, during bad times everyone saved. These two types of firms had a lot riding on the current economic situation. Allowing the three types of firms to join up together would make them all more stable.
The law that prevented these 3 types of firms from joining was enacted in 1933, as a part of the Glass-Steagall Act. Glass and Steagall were two legislators that supported the bill. This is the same bill that brought the FDIC into existence. It was a part of sweeping legislation as a result of the lessons learned from the market crash in 1929 which lead to the Great Depression.
Over time various companies got their way and were able to pick up some additional, previously banned businesses. But for the most part, the 3 types of financial services companies had to operate on their own.
That is until the 1990s. Just about everyone could feel the changing tides. The banks had now really been lobbying Congress to repeal this part of Glass-Steagall for over a decade. Citi had just received a 2 year probation allowing it to go through some big mergers and become a financial services conglomerate because Citi was convinced legislation was coming. The idea is that bigger banks would be more competitive and drive down costs. They would also be more financially stable.
Sure enough, in 1999 the Gramm-Leach-Bliley Act was passed. Now banks were allowed to merge with brokers, and insurance, and any other financial services firm that was previously banned. And merge they did. As a result, just about every financial services company at least dabbles in the other two services. Banks are really into investments, and some do insurance. Credit card companies are now taking deposits and buying banks. Everyone is doing insurance. Some blame the fact that these firms got so big they didn’t know what each branch was doing, and this lead to the downfall of them, and the economy.
So, as I said before, McCain and some others are introducing legislation that would bring back Glass-Steagall and force all the banks to break up again. Will this prevent this banking problem from happening again? I don’t know. More than likely we’d go another decade with broken up banks, and then some other senator will repeal this legislation because the banks are paying for all his campaigning. He’d tout all the benefits of a large bank. Someone would be smart enough to speak up, but no one will listen. We are always doomed to repeat history, no matter the lessons we learn.
Will this new bill be passed? It’s unknown at this time. Congress is still focused on passing legislation creating new regulations on banks and only after that’s done will they start looking at the McCain stuff. If the new legislation is good enough, McCain’s bill won’t be needed. The sad thing is you never know if legislation is good enough until it’s too late. I’m not sure if it really would be good for financial services if Glass-Steagall was brought back, but at least you now know what people are talking about when they say Glass-Steagall.
If you feel like it, drop a note in the comments with your opion. Should Glass-Steagall come back or do we just need better regulation?
 By The Weakonomist |
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I think the resurrection of Glass-Steagall would have an adverse effect on the financial sector over a three to five year period of time. Then things would level out.
Things did get crazy when financial institutions would make loans against investments to individuals to buy life insurance inside a trust and they were the trustee. A Glass-Steagall-type-thing would reduce this type of monkey business, but it would also increase fighting between industries as they all fight for their own self-interests. Maybe now that fee-only advisors are more established, their fiduciary role would fit better in a segregated financial industry.