Forget Dodd-Frank, Reinstate Glass-Steagall

I keep asking if this administration and Congress can do anything right?

Dodd-Frank Law is a Flop

It's been years, 3 years to be exact, since something called "Dodd Frank" bill was passed into law. We had better hope that a financial crisis doesn't erupt this month, because only 20% of the rules have even been written. I call that a FLOP.

It's still a moving  target too. So far, it totals over 2,000 pages and counting. You know when a law becomes 1000s of pages, that banksters will soon figure out a way to wiggle around these rules. Heck, the banksters are writing the rules!  Laws need to resemble the succinct wording of Amendments to the Constitution.  For example, in this case, the law needs to read something like this: "If taxpayer money is lost due to banking losses, then the entire executive management of the bank will go to jail for 'financial malfeasance'  and all of their earnings, including stock options, for the past 7 years will be clawed back."

In commentary about the status of Dodd-Frank from CNBC:

It had some good ideas when it first passed but it's pretty much a failure," said Kurt Schacht, managing director of standards and finance market integrity at CFA Institute, an association of investment professionals. "It's confusing, to say the least, and the rules keep changing," Schacht said. "The financial industry keeps pushing back on the rules and trying to get them changed. It's a mess."  

Forget Dodd-Frank, Reinstate Glass Steagall

Meanwhile a more serious debate about re-instating the Glass Steagall act has emerged.  Glass Steagall, enacted in the 1930s to separate conventional banking activities from investment banking, was repealed in 1999 and there has been nothing but financial instability and shenanigans every since.  Glass Steagall worked for a long time.

See a very well-written article excerpt from Liam Halligan at the Telegraph:

For many years, I have banged the drum for the US in particular, but also the UK and Western Europe, to reimpose a decisive split between commercial banks (that take deposits and lend to ordinary firms and households) and investment banks (which take big risks). Why? Because since this divide was incrementally removed in the UK and US during the late 1980s and 1990s, financial markets have lurched from crisis to crisis. No other single act did more to cause “sub-prime” and transform it from a banking crisis into a broader fiscal and economic crisis.

Once the depression-era Glass-Steagall legislation was repealed in America in 1999, Wall Street investment banks systematically used taxpayer-backed deposits to take ultra-risky bets, knowing they’d be rescued if their bets backfired. In so doing, they were competing with their City brethren, the UK having ended its “informal” banking split during the 1986 “Big Bang”.

Separation would prevent investment banks from gambling with ordinary deposits, exposing them to the full force of the market. At a stroke, our banking system would be far safer and the “too big to fail” issue resolved. That’s anathema, of course, to the banking giants who rely on government cash for survival and from whom politicians receive campaign donations and cushy jobs once their political careers expire. Yet our lack of genuine banking reform is sowing the seeds of the next collapse – with all the economic dislocation, human pain and further bail-outs that would bring.

Those of us who called for a new Glass-Steagall back in the immediate aftermath of the sub-prime crisis were often derided. Yet numerous very serious people have emerged as strong supporters of this view. Outgoing Bank of England Governor, Sir Mervyn King, backs reimposing a genuine divide. So does former Federal Reserve boss Paul Volcker and former UK chancellor Lord Lawson. Even John Reed and Sandy Weill, the two Wall Street plutocrats who made vast fortunes off the back of the Clinton-era repeal, now admit that dismantling Glass-Steagall was wrong.

Draft legislation to restore Glass-Steagall has just been introduced in the US Senate. This is a companion bill to a measure in the House of Representatives that now has 63 sponsors. Sick of market instability, America’s mighty farming lobby last week called for a new Glass-Steagall. “Congress must learn from the past in order to prevent future financial crises,” said Roger Johnson, president of the US National Farmers’ Union.

We’ve also lately had a courageous set of statements from an economist called Jeff Sachs. A professor at Columbia University, Sachs is a hugely authoritative figure. In truly astonishing public testimony to the Federal Reserve, Sachs recently lacerated Wall Street and its links to America’s political class, pointing repeatedly to “massive fraud” in the US financial services industry. Referring to “pathologically criminal behavior”, Sachs accused the big investment banks of “gaming the system to a remarkable extent… they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies”.

Sachs then called for the “recreation of a mechanism where liquidity is separated from large-scale financial gambling”.

That was the role of Glass Steagall, to separate FDIC insured bank deposits from financial gambling.   Bring it on!   Bring back Glass-Steagall!