Hillary Clinton won’t propose
reinstating a bank break-up law known as the Glass-Steagall Act – at least according
to Alan Blinder, an economist who has been advising Clinton’s campaign. “You’re
not going to see Glass-Steagall,” Blinder said after her economic speech
Monday in which she failed to mention it. Blinder said he had spoken to
Clinton directly about Glass-Steagall.
This is a big mistake.
It’s a mistake
politically because people who believe Hillary Clinton is still too close to
Wall Street will not be reassured by her position on Glass-Steagall. Many will recall
that her husband led the way to repealing Glass Steagall in 1999 at the request
of the big Wall Street banks.
It’s a big mistake economically
because the repeal of Glass-Steagall led directly to the 2008 Wall Street
crash, and without it we’re in danger of another one.
Some background: During the Roaring
Twenties, so much money could be made by speculating on shares of stock that several
big Wall Street banks began selling stock along side their traditional banking
services – taking in deposits and making loans.
Some banks went further, lending to
pools of speculators that used the money to pump up share prices. The banks sold the
shares to their customers, only to have the share prices collapse when the
speculators dumped them.
For the banks, it was an egregious but hugely profitable conflict of
interest.
After the entire stock market crashed
in 1929, ushering in the Great Depression, Washington needed to restore the
public’s faith in the banking system. One step was for Congress to enact
legislation insuring commercial deposits against bank losses.
Another was to
prevent the kinds of conflicts of interest that resulted in such losses, and
which had fueled the boom and subsequent bust. Under the Glass-Steagall Act of 1933,
banks couldn’t both gamble in the market and also take in deposits and make
loans. They’d have to choose between the two.
“The idea is pretty
simple behind this one,” Senator Elizabeth Warren said a few days ago,
explaining her bill to resurrect Glass-Steagall. “If banks want to engage in
high-risk trading — they can go for it, but they can’t get access to ensured
deposits and put the taxpayers on the hook for that reason.”
For more than six decades after 1933,
Glass-Steagall worked exactly as it was intended to. During that long interval few
banks failed and no financial panic endangered the banking system.
But the big
Wall Street banks weren’t content. They wanted bigger profits. They thought
they could make far more money by gambling with commercial deposits. So they set out to whittle down
Glass-Steagall.
Finally, in 1999, President Bill Clinton struck a deal with Republican
Senator Phil Gramm to do exactly what Wall Street wanted, and repeal
Glass-Steagall altogether.
What happened next? An almost exact replay of the Roaring
Twenties. Once again, banks originated fraudulent loans and sold them to their
customers in the form of securities. Once again, there was a huge conflict of interest that finally resulted in a banking crisis.
This time the banks were bailed out, but millions of Americans lost their savings, their jobs, even their homes.
A personal note. I worked for Bill
Clinton as Secretary of Labor and I believe most of his economic policies were
sound. But during those years I was in fairly continuous battle with some other
of his advisers who seemed determined to do Wall Street’s
bidding.
On Glass-Steagall, they clearly won.
To this day some Wall Street
apologists argue Glass-Steagall wouldn’t have prevented the 2008 crisis because
the real culprits were nonbanks like Lehman Brothers and Bear Stearns.
Baloney.
These nonbanks got their funding from the big banks in the form of lines of
credit, mortgages, and repurchase agreements. If the big banks hadn’t provided
them the money, the nonbanks wouldn’t have got into trouble.
And why were the
banks able to give them easy credit on bad collateral? Because Glass-Steagall
was gone.
Other apologists for the Street blame
the crisis on unscrupulous mortgage brokers.
Surely mortgage brokers do share some
of the responsibility. But here again, the big banks were accessories and
enablers.
The mortgage brokers couldn’t have funded the mortgage loans if the banks
hadn’t bought them. And the big banks couldn’t have bought them if Glass-Steagall
were still in place.
I’ve also heard bank executives claim
there’s no reason to resurrect Glass-Steagall because none of the big banks actually
failed.
This is like arguing lifeguards are no longer necessary at beaches
where no one has drowned. It ignores the fact that the big banks were bailed
out. If the government hadn’t thrown them lifelines, many would have gone
under.
Remember? Their balance sheets were full of junky paper, non-performing loans, and
worthless derivatives. They were bailed out because they were too big to fail. And
the reason for resurrecting Glass-Steagall is we don’t want to go through that ever again.
As George Santayana famously quipped,
those who cannot remember the past are condemned to repeat it. In the roaring
2000’s, just as in the Roaring Twenties, America’s big banks used insured
deposits to underwrite their gambling in private securities, and then dump the
securities on their customers.
It ended badly.
This is precisely what the
Glass-Steagall Act was designed to prevent – and did prevent for more than six
decades.
Hillary Clinton, of all people,
should remember.