What Was Glass Steagall and Why Should We Bring It Back?

Source

As TV Explains It:

NY Stock Exchange

Source

America’s credit and commercial banking system was the brainchild of our first president’s treasury secretary, Alexander Hamilton. We started down the right road and the result was that we became the world’s leading industrial and agriculture power over the course of two centuries.

But as time went by, we strayed from the true path blazed by our forefathers and found ourselves economically mired in The Great Depression of the 1930s. More than four thousand banks in America closed their doors forever between 1929 and 1933 leaving depositors with more than four million dollars in losses. The Glass-Steagall Act of 1933 was a return to Hamilton’s principles of banking, which separated commercial banks that take deposits and make loans from investment banks that sell bonds and stocks. It was passed as a result of a congressional investigation that exposed recklessness, cronyism, and fraud in banking practices.

Playing fast and loose with banking practices again brought the country’s economy to the brink of collapse after Glass-Steagall's repeal in 1998. The resulting instability of U.S. financial institutions cost taxpayers almost twenty trillion dollars in bailouts and subsidies that were paid out in a desperate attempt to keep us from plunging headlong over the fiscal cliff.


Why was it repealed?

By the early 1980s, anti-regulation advocates from both political parties were enjoying a field day in Washington. Bit by bit they were kicking the props out from under our safeguards in our financial structure. Crisises like what happened to savings and loans establishments in mid-decade have not been completely salvaged even today. By early 1987, the Federal Reserve Board voted three to two to let banks once again engage in a range of securities underwriting activities. You would have thought this decision would have set off alarms for anyone who ever heard their fathers tell horror stories of what their families had lived through just fifty years earlier. But nobody was listening for alarms. There was simply too much money to be made.

Several members of the George H.W. Bush administration including Federal Reserve Chairman Alan Greenspan and Treasury Secretary James Baker may not have set out to weakened Glass-Steagall, but they certainly did. For example they let banks underwrite municipal bonds with an explanation that stated they were safe by definition. In 1991, the President Bush called on Congress to repeal the law outright. Although that effort was voted down in the House of Representatives, the anti-Glass-Steagall movement was underway.

During the presidency of Bill Clinton, Greenspan convinced regulators to raise the ceiling from ten to twenty-five percent on securities underwriting for bank holding companies that owned investment-bank affiliates. Treasury Secretary Robert Rubin clearly supported bigger and more diversified banks supposedly in order to increase the nation's global competiveness. Rubin went on to become the chairman of Citigroup Chairman.

A Republican-led Congress and Democratic President Bill Clinton in the mid 1990s introduced a new age of “full service,” "too-big-to-fail" financial institutions. November 12, 1999, Clinton signed the Financial Modernization Act into law, basically a repeal of Glass-Steagall, leading to the end of the longest crisis-free period in U.S. financial history. At the time, industry lobbyists argued that this modern experiment in deregulation would bring greater stability and competitiveness to the financial services industry.


Some House Democrats initially argued that the banks should not be given so much unregulated freedom. Most of them changed their minds after the bill added provisions that modestly expanded the Community Reinvestment Act, an effort to make lending products available to their low-income constituents. In the final count of votes, only eight Senators voted no: seven Democrats; Byron Dorgan, Barbara Boxer, Barbara Mikulski, Tom Harkin, Richard Bryan, Russ Feingold, Paul Wellstone; and one Republican, Richard Shelby of Alabama.

Some of the loudest voices for repeal were among its most conspicuous beneficiaries. Senator Phil Gramm, after retiring in 2002, went to work for UBS AG, a Swiss commercial bank that moved into investment banking. Rubin, the former Treasury Secretary, took that Citigroup chairmanship with a reported initial annual compensation of $40 million. Citigroup lost $27.7 billion in 2008 and is second only to AIG in the huge sums of taxpayer money it ended up receiving in a desperate effort to keep its doors open.

Another advocate of repeal, Lawrence Summers, succeeded Rubin as Treasury Secretary and now heads President Obama’s White House Council of Economic Advisors.

Economists have laid most of the damage to the country at the feet of pure investment banks such as MorganStanley, Bear Stearns, and Lehman Brothers, and insurance company, AIG.

Commercial banks played their part as well as buyers and sellers of mortgage-backed securities, credit-default swaps, and other explosive financial derivatives. Without the weakening and ultimate repeal of Glass-Steagall, the banks would have been barred from most of these activities. The market and appetite for derivatives would then have been far smaller, and Washington might not have felt a need to rescue the very institutions that created the crisis.

Greenspan, while not outright defending the regulations of Glass-Steagall, has stated since the financial fall-out of 2008 that if financial institutions are truly too big to fail, they just might be too big to exist. We can only hope our legislators are listening and learning from the mistakes of the not-so-distant past. The Great Depression might be too long ago for them to learn from, but we are still reeling from this last debacle. Surely our elected officials can recall the events of just a couple of years ago.

Three bills to restore Glass-Steagall are now pending in Congress. A bipartisan group of four senators including Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) have introduced an updated version of the landmark act aimed at reining in risk at America's largest banks.

The new bill is also cosponsored by Senators Maria Cantwell (D-Wash.) and Angus King (I-Maine). Cantwell and McCain previously introduced the plan as an amendment to the 2010 Dodd-Frank financial reform bill, but that bill was never approved. Believe it or not, after the economic crisis of recent years, most federal regulators are still opposed to reinstating Glass-Steagall. They argue it would force big banks to spin off hundreds of billions of dollars worth of business into independent firms. But the four legislators who have authored this pending bill don’t see that result as a bad thing.

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Warren said. "The four biggest banks are now thirty percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk."

If readers of this hub have a strong opinion on this legislation, I would encourage them to contact their own senators and congressmen/women and express that opinion while this issue is being debated. Someone once said, "It is never too late to do the right thing." And sometimes our only option is to rebuild from the ashes.


Points of View - Senator Elizabeth Warren

President Bill Clinton

More by this Author


Comments 12 comments

HSchneider 3 years ago from Parsippany, New Jersey

Excellent Hub, Kathleen. The gutting and then repealing of Glass Steagall was what set the stage for a long list of errors and crimes that caused the 2008 financial meltdown. If Glass Steagall had still been in place, most everything else would not have happened.


billybuc profile image

billybuc 3 years ago from Olympia, WA

Great history lesson Kathleen! I was aware of this but I'm willing to bet most who read it are not...so this is so important. Well done!


peoplepower73 profile image

peoplepower73 3 years ago from Placentia California

Excellent hub. As I was reading it, I thought: "I really like the style of this article, it could be the start of a book." When I scrolled down to the bottom, I noticed that you are a published author with two of your books listed on Amazon, congratulations!

I knew about Glass Steagall and Gramm-Leach-Bliley because I did the research for a hub that I wrote about the root cause of the financial meltdown. I believe most reader's eyes will glaze over when presented with definitions of derivatives, credit default swaps, mortgage backed securities, and collateralize debt obligations. However, I do think they can relate to the notion that these institutions are using their tax payer money and investing it at high risk.

Your YouTube presentation of Elizabeth Warren does a great job of explaining how all of this came about and what she is trying to do. I hope she can pull this off. I know there are a lot of people in Washington who are afraid of her.

I did find a couple of typos: In the second paragraph, there is the word "trafficed", I think you meant "traded." In the fourth paragraph, there is the word "extend." I think you meant "extent."

Everybody in the country should understand what happened to create this meltdown. Therefore, I'm sharing this every way I can, Voting up and useful.


Kathleen Cochran profile image

Kathleen Cochran 3 years ago from Atlanta, Georgia Author

I'm flattered you like my writing style, especially with a topic as potentially dry as this! And I'm grateful for your edits, always. We all need editors. I'll make the changes and hopefully future readers will wonder what your comment was about. If only we would understand the possible consequences of what we do as a government when we decide to fix something that wasn't broken until we started messing with it.

(I meant "trafficked" but when a reader has to re-read something I've written for it to make sense, I think it's time to be clearer. Thanks.)


forbcrin profile image

forbcrin 3 years ago from Michigan

Too bad people don't want to learn from history. Nothing under the sun is new, it is just presented from a different angle...

It seems that we have a tradition on burning the boat at sea to avoid boredom and to induce a strong wish for life!!!


Kathleen Cochran profile image

Kathleen Cochran 3 years ago from Atlanta, Georgia Author

forbcrin: What an image you've created with your words. Too true.

The law of unintended consequences beginning with deregulation and ending (or moving on) to disaster. We always think we're so smart, we know better, till we learn sometimes our predecessors were right in the first place.

Thanks for commenting.


phdast7 profile image

phdast7 3 years ago from Atlanta, Georgia

Excellent, Excellent, Excellent! Should be on every history and political science course "reading list." I agree with everything peoplepower said. In general most Americans are woefully ignorant of what exactly happened and why. Thanks for taking the time to write a "plain English" version for those of us who are not economists. Sharing. Theresa


Kathleen Cochran profile image

Kathleen Cochran 3 years ago from Atlanta, Georgia Author

You have absolute permission to use this hub for whatever use you find for it with your students. Just let me know of any corrections you discover in your studies.


Gawth profile image

Gawth 23 months ago from Millboro, Virginia

The repeal of Glass-Steagall was a stupid and ruinous action purchased by big business and too graciously granted by money hungry politicians. Republicans deserve most of the blame but not all of it. ( If you want to know who owns a president, examine who pays LAVISHLY for their big inaugural bashes.) Your Hub was a very good one. Unless the big financial institutions know they can fail, they will continue to maliciously market investments that can wreck the economy again.


fpherj48 profile image

fpherj48 23 months ago from Beautiful Upstate New York

Kathleen......I'd have paid a decent sum for this education. Thank you so much! I will surely have to research some to understand more fully...because I've not even attempted to look into how and/or WHY we experienced the recent tsunami. I've been much too busy frantically cleaning up, repairing, rebuilding, and "watching my back".....nothing like a good dose of distrust and paranoia for the average American.

You are one seriously bright woman and a prolific writer!...UP+++ pinned & tweeted....shared w/ HP


Kathleen Cochran profile image

Kathleen Cochran 23 months ago from Atlanta, Georgia Author

I'd like to say we suffered from the law of unintended consequences, but I'm not so sure they were unintended. The question remains: Did we learn our lesson and have we done anything with those lessons?


Kathleen Cochran profile image

Kathleen Cochran 23 months ago from Atlanta, Georgia Author

We all need to be paying attention. I seriously doubt, though, if we "little people" can fix the problems. Nobody with power seems all that interested in making sure this problem gets fixed. If I've raised the debate, I hope I've done something positive. Thank you.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Click to Rate This Article
    working