I find it galling when an ill-informed leftist tries to debate the role of government with a Tea Party advocate and goes to the tired argument, “Since you’re against paying taxes, I guess you don’t want paved roads or police or firefighters!” Somewhere, somehow a large number of people seemed to have picked up the erroneous notion that we are anarchists. We are not. We understand the role of taxes and the role of government. What we take exception to, however, is the flagrant disregard for other peoples’ money and the ever-expanding role of government in citizens’ lives. We object not to the existence of either tax obligations nor government; we object to the sheer size of both.
To that end, people are often dumbfounded when I explain to them that I am not against minimal banking regulations. Capitalism functions best with minimal regulation, not when it’s a free-for-all. In the wake of our economic catastrophe, there has been much talk as to who’s at fault. I am of the belief that there were many factors; numerous pillars of our economy crumbled nearly simultaneously. While the left love to point the finger at a lack of banking regulations, it was the arm-twisting of banks by the government to take on toxic loans that could and would never be repaid. It was a hostile environment towards business. It was over-unionization, and yes, it was also the absence of one vital piece of banking regulation that helped bring us to where we are at. Yes, I’m talking about Glass-Steagall.
Glass-Steagall was, quite possibly, the only good economic reform to be found in the New Deal. While 1930′s Democrats put us on the road to ruin we drive today, Glass-Steagall was a provision that created a divide between commercial banks and brokerage firms that underwrite securities. Passed in 1933, the bill forced banks to decide what kind of financial institution they would be. A bank that stores money, provides checks and gives nominal interest for a savings account, provides low payout for low risk. A brokerage firm, whose income is derived from taking calculated risks, pays more dividends, but is also a higher risk for investors. Before the crash, commercial banks were playing the high-risk game, but with grandma’s savings account. When the economy tanked, it took both kinds of financial institutions with it. While we saw small sidesteps of Glass-Steagall over the years, it wasn’t until 1998 that we saw the final blow dealt to the law.
What? Government involvement in a free market? Yes, I’ll admit that this is a very rare occurrence; I advocate for Glass-Steagall for a number of reasons.
A) This level of government involvement does not hinder growth. It encourages it. It is less a regulation as it is a call for a declaration of intent by financial institutions. It allows grandma to deposit her money, knowing that it is guarded well, but that she will never get rich from her savings account. It allows banks to make smart mortgage decisions, knowing that their banks will not be swamped by fast-and-loose risk management. It allows brokerage firms to encourage risk as everybody involved knows the risk.
B) Glass-Steagall enables free investing and banking the same way a median on a freeway enables drivers to drive unafraid of a head-on collision. The law provides freedom for cars on both sides of the dividing line. The promotion of Glass-Steagall is different from other, contemporary regulations with a social agenda. The modern housing crisis was bred from bleeding-hearts wanting to sleep better at night knowing they put a family in a house, despite the fact that they couldn’t afford it and the bubble would burst. Whenever we consider governmental policies, we should consider what kind of agenda it pursues. Does it aim to promote a certain outcome, rather than promote opportunity, such as financial legislation with a true aim of social justice?
The law was chipped away at throughout the 80′s with “reinterpretations” of the law and tricky maneuvering. Finally, in 1998, Sandy Weill and John Reed merged Traveler’s Insurance Group with Citicorp to form Citigroup and put the last nail in the coffin of Glass-Steagall. The creation of the financial supermarket and simultaneous eradication of Glass-Steagall provided millions of dollars for those involved, contributed to a volatile market and helped create the atmosphere of hostility the left shows towards anyone that makes more than minimum wage. Thanks to the leaders of these financial supermarkets, we must now endure years of unnecessary governmental regulations, such as the Dodd-Frank Act.
In an outrageous twist, Weill, who made his millions eroding the legislation that allowed our market to remain free from 1933 to 1998, declared this month that we ought to “split up investment banking from banking”, leaving the rest of us wondering, “Are you kidding me?!”
It seems that after he made his millions, Weill would now like the financial security of the dividing line he helped eliminate. Weill stated,
“What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail… If they want to hedge what they’re doing with their investments, let them do it in a way that’s going to be mark-to-market so they’re never going to be hit.”
Weill is the living embodiment of that old phrase uttered by parents across the globe, “Do as I say, not as I do.”
Ridiculously enough, former Senator Chris Dodd, best known as one-half of the geniuses that brought us the catastrophic Dodd-Frank Act, has declared that he is against splitting up the banks. The one financial provision that allows for an accurate risk/benefit analysis on the part of the investor, Dodd is against. However, his convoluted Act that demonizes risk, ties the hands of lending institutions and passes costs onto consumers, is A-okay.
Dodd feels that the idea of dividing the two kinds of financial institutions is “too simplistic an approach.” He said he favors the Dodd-Frank Act because it grants government “that Draconian step” to step in and regulate businesses. In typical fashion, Dodd’s answer is more government regulation than the modest provisions of Glass-Steagall. Thus, Dodd’s stance illustrates why conservatives fear even modest government financial regulation: if you give them an inch…
The story of Glass-Steagall is the story of a defining of the rules for a complex economy. We live with rules in society. We must be willing to accept a few rules to keep things running smoothly. It is in chaos that statists seize upon a crisis to interject government into every facet of American life. We must look to replicate the kind of economic prosperity we had for most of the 20th century, and bringing back Glass- Steagall is a good first step.