In the spirit of open-mindedness and good fellowship I think it is right that we look for a liberal position with which we agree. So this is my contribution for the year, so far:
In the January 13th WSJ’s “Tilting Yard” Thomas Frank pens his oped entitled, Bring Back Glass-Steagall. Recall that Glass-Steagall was the depression era act that separated investment banking from commercial banking. Commercial banking is what we’re most familiar with our checking accounts, saving accounts, auto loans, and home loans; for businesses this would include inventory loans and general working capital loans. This commercial banking is highly regulated at several levels and since the depression has federal government guarantees associated with it.
Investment banking, on the other hand, has to do with securities, underwriting, advising, and trading. Old firm names like Rothschild, Lehman, and Solomon were the traditional investment bankers. They had little regulation and no government guarantees. These firms advised companies, brought them public often taking equity positions in them, and financed their bond issues by underwriting their debt; they also developed very profitable trading operations in securities and commodities of all types. Wall Street investment banks pioneered new forms of finance involving security assembly and packaging, derivatives, and multi-jurisdictional tax and security laws. Again, there was little regulation and no taxpayer guarantees.
In 1999 with both Republicans and Democrats supporting the legislation, Glass-Steagall was repealed. President Clinton signed the legislation which became law. Combinations were off to the races. Old bank names fell by the wayside and behemoths like Citi and Bank of America handled all things financial! You don’t hear commercials for the old money center banks anymore. Chase Manhattan is now JP Morgan Chase; Mellon National is Bank of New York Mellon; Boatman’s Bank of St. Louis is now Bank of America. You get the picture.
With the repeal of Glass-Steagall we find a dangerous mixture government guarantees and significant private risk taking. This simply doesn’t mix. Fannie and Freddie are a good analogy. Shareholders get the upside, taxpayers get the downside. This is what we have today. This is to a large extent why we are in trouble.
So when the liberal Thomas Frank calls for the return of Glass-Steagall, I agree with him. He is in good company with nobel laureate economist Joseph Stiglitz and former Fed Chairman Paul Volcker. The simple principle is that we don’t need private enterprises gambling with taxpayer money ever, no way!
Now, at the risk of being too long in this post, I have a challenge for you: Try to find the separation of commercial banking and investment banking in any of the financial regulation bills being proposed in the House or Senate. Try to find Obama advocating any such thing. Try to find any proposals to liquidate Fannie and Freddie being sponsored by Reid, Pelosi, Baucus, Dodd, Frank, or Durbin. You won’t. Hint: Wall Street funds the Democrats and the Democrats are the party of Wall Street. Fannie and Freddie are some of the drugs that help keep Democrats in power with taxpayer financing for non-qualified home buyers.
Tom Motherway