Almost twenty years after the repeal of Glass Steagall, some Republicans, including Donald Trump and John McCain, seem to be willing to reinstate Glass Steagall.
But how this new Glass Steagall would be different from the original? Which improvements would be brought? What elements of this new version of Glass Steagall would convince Republicans in the Congress to support such a reinstate? Why would this new Glass Steagall would not be too « big government » for Republicans to support it? Is there any element of such a new Glass Steagall that would be favor free market and free enterprise?
https://www.rollcall.com/news/policy/senators-see-trump-support-giving-glass-steagall-bill-chance
One thing is to establish if the repeal of Glass Steagall under Clinton really contributed to the Great Recession. Sanders and the left seem to think so. Of course Bearn Stearns, Lehman Brothers, Merrill Lynch, and AIG were not in commercial banking. These were among the main players at the heart of the crisis. Wachovia and Washington Mutual made bad loans, pretty straightforward there. Bank of America bought Countrywide, a mortgage lender, not an investment bank and that hurt them. JP Morgan and Wells Fargo, two companies with large investment banks, did not take government bailouts.
Source:
https://www.washingtonpost.com/lets-shatter-the-myth-on-glass-steagall/2012/07/27/gJQASaOAGX_story.htmlAnother point is some on the left attribute the application of Glass-Steagall to the economic prosperity of the US from the 1930's to the end of 20th century. Of course Europe never had such a ruling but also similarly prospered.
In the 1920's and 30's many banks could not expand their product portfolios or even have branches. These were government regulations in place in the US at the time which some theorize as a more likely contributor to the massive US bank failures than investment banking speculation. Canada did not have these kind of regulations and did not have bank failures in the 1930's or even during the post Civil War era like in the US. Canada for that matter did not have a central bank till 1934.
Canada did not suffer because it was better regulated in terms of investment banking vs commercial banking. They did not have Glass-Steagall either and it is widely held that Canada fared quite well during the recession. As the linked article states Canada's recession was the shortest and mildest of the G7 nations. It also indicates that in the 80's the major banks acquired investment firms. The article is not positive on the cost of financial services to Canadians.
http://www.economist.com/node/16059938 Extrapolating from that point, I am not saying to replicate the Canadian system with its high cost of financial services but only to say that the whole argument of the separation being critical does not hold water.
We can't look at Glass-Steagall without considering Dodd-Frank which was a sort of bandage put in place after the recession to do what G-S had previously done. Since Dodd-Frank, though, only 3 banks have been chartered in the US. That is an amazing record. Many small banks have been consolidated into larger groups many citing the red tape of the current regulatory climate.
With the Volcker Rule currently regulators check transactions to see if they are copacetic or not. That seems a very large task from just a logistical standpoint.
Even in the establishment there was criticism of the Volcker Rule - FRB governor Kevin Warsh mentioned:
"We must resurrect market discipline as a complement to prudential supervision. Otherwise, the spectre of government support threatens to confuse price signals and create a class of institutions that operate under different rules.… The US economy runs grave risks if we slouch toward a quasi–public utility model."
It seems counter logic to call for regulation, but due to moral hazard issues with the FDIC, Fed and other state institutions in place that as long as the current fractional reserve central banking system is in place it could make sense to separate commercial banking from investment banking from a libertarian perspective.
Doing so in concert with a repeal of Dodd-Frank would also allow for more community banks to be chartered.
It would not solve the mix of government with banking but it would help the small business climate outside of bank/finance heavy areas like NYC, DC, and Silicon Valley.
It's a very complicated puzzle.
