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Monday, June 22, 2009

Should We Reinstate Glass-Steagall?

The one unmentionable topic that has become the non-barking canine is reinstating the Glass-Steagall Act after we repeal the Gramm-Leach-Bliley Act. Since no one else will say it aloud, I will. Let us re-erect supposedly harsh regulatory lines separating activities between commercial banks and investment banks. Once more, commercial banks may only underwrite government-issued bonds (which should keep them busy for years), thus avoiding the temptation of deposits. The remainder of underwriting securities goes to investment banks.

Before everyone reaches for his or her keyboard, telling me why repealing the Gramm-Leach-Bliley Act, which negated Glass-Steagall, is impractical and is a business-growing impediment, in the 21st century, that is precisely the dash of regulatory perspective we seriously need now.

Financial institutions will forever devote a significant portion of their energy and their cash to figure out ways around regulatory restrictions. It is not the job of domestic authorities to placate the whims and desires of global institutions playing international markets, using docile laws, for fun and profits.The values of international capitalism do not run congruent with the values of domestic capitalism. In addition, domestic capitalism has a lousy track record against international capitalism.

The Obama Administration has giving broad powers to the Federal Reserve to oversee banking, and amorphous money institutions, including increased capital ratios. New ratios, however, are below some international standards.Another byproduct of the reshuffling of regulatory priorities will mix for the first time the oversight of commerce and banking. Nevertheless, the absence of strict divisions between banking business lines is unchanged.

Under the Glass-Steagall Act, when enacted in 1933, regulators protected bank depositors from stock market speculation and other investment banking activities. Over time, we also generated enough wealth to end the Great Depression, create the largest middle-class any nation has experienced in history. We were able profitably expanded the aviation, automobile, and pharmaceutical industries.

Nor did American capitalism neglect the opportunities to make money in entertainment, travel, aerospace, electronics, or telecommunications. The existence of Glass-Steagall did not block private industry from entering, and making individuals rich, from the computer and personal computer areas.Trade and manufacturing benefited greatly through the years with G-S on the books.

Last but not least, the financial industry. As Charlie Sheen’s character, Bud Fox demanded an answer to his question from Michael Douglas’s Oscar-winning portrayal of Gordon Gekko in Oliver Stone’s 1987 Wall Street, “How much is enough?" People in the financial services industry made more money than most other Americans did throughout their careers. Wall Street did ok under Glass-Steagall. What good does it do to kill the golden goose as it increase production of delivering the golden eggs?

We will not go backwards even if it is in our best interest. We culturally frown upon looking backwards. Sometimes it is a virtue while other times it is risky.

Do we like managing risk or do we attempt to manage the risk we like?

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