I’ve been a little surprised at the support by Congress to reinstate the Glass-Steagall Act. When US Senators John McCain and Maria Cantwell introduced the legislation, it seemed it was done more to get their names out there and to show they were attempting to do something to their constituents, rather than over concerns for the health of the banking system and economy. It wouldn’t surprise me if McCain and Cantwell are shocked by the growing support as well.
What the Glass-Steagall Act did in general was separate commercial banking from investment banking, something which allegedly helped keep the industry healthy. Specifics of the arrangement would be that a bank which took in deposits wouldn’t be allowed to sell insurance, own brokerages, underwrite securities or take part in proprietary trading.
One problem supporters have to deal with of course is it was in place when the Savings and Loan debacle happened, suggesting that all the existing regulations at the time didn’t and couldn’t prevent the crisis from happening.
In the Savings & Loan crisis, there were many healthy banks which survived, and similar to today, they were those that operated conservatively and went about doing the business of banking without attempting dubious investments to grow at almost any expense.
What we must understand is this has absolutely nothing to do with the government bailing out banks or companies. The solid banks will take over the healthy assets of failing banks and blend them into their operations to make them even better. To prop up failing banks in an attempt to resuscitate a corpse does nothing to take care of the underlying problems, and only keeps in an existence a poorly run company.
Who cares what the name on the bank doors say? If they are run poorly and management doesn’t properly assess the consumer or business environment, the market will take care of them by eliminating them from the competition, while those well-run companies flourish and add real value to the people.
So would reinstating Glass-Steagall improve American banking in any way? I don’t see how it could.
Assuming Glass-Steagall had been in place during the current banking and economic crisis, how would that have changed the situation with investment banks Lehman Brothers Holdings or Bear Stearns? They would have went under whether it was there or not.
It would be interesting if this were to be actually embraced and to see the amazing fallout as banks and financial institutions would be forced to break up and divest of the various commercial and investment units now under one corporate roof.
The banking problem won’t be solved by more regulations and oversight, but by leaving the markets alone to discipline themselves by bad companies being allowed to fail, while the remaining or new companies emerge to handle the business lost by the losers. Consumers or businesses aren’t the ones that lose, only those that ran their companies into the ground will find it tough to get a similar job in the future.
