|
 |
 |
|
| ||||
          | |||||||
| |||||||
| |||||||
|
||||||||||||||||
|
||||||||||||||||
|
|
|
||||||||||||||
 |
« Previous Entry | Main | Next Entry » Is There Any Talk of Reinstating Glass-Steagall? Name:
Dennis Long
Question: Is there any talk of reinstating the Glass-Steagall Act? Paul Solman: For those who can't remember as far back as 1933, Glass-Steagall was an act of Congress passed only three months after President Roosevelt took office and declared a national "bank holiday." The so-called Banking Act established the FDIC and therefore deposit insurance but also split apart deposit banking from "investment" banking to protect the system from speculation, especially in the then-humbled stock market. Thus, for example, the House of Morgan was split into J.P. Morgan (commercial bank) and Morgan Stanley (investment bank, U.S.) and Morgan Grenfell (investment bank, UK). Sixty-six years later, a bill called Gramm-Leach-Billey repealed the commercial/investment split, with total support from the Republicans in Congress and the financial honchos of the Clinton administration. Among the dissenters was Senator Bryan Dorgan (D-N.D.), who warned that the new combined banks "would become too big to fail." Chuck Schumer (D-N.Y.) spoke for the vast majority: "If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world...There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive." So now, at last, to your question: Is repeal of Gramm-Leach-Billey on the horizon? Apparently not. Or at least, not as far as I can tell, from what reading I've been able to do. But it may not matter. That's because the administration and the Fed under Bernanke seem deeply committed to re-regulating the banking system and their main concern is "too big to fail." That suggests smaller banks in the future -- perhaps much smaller banks. We don't yet know how the powers-that-be intend to accomplish this; they don't seem to know yet themselves. But when you hear Ben Bernanke talk, he seems to worry more about the potential for OVER-regulation than not doing enough. As for too big to fail: "Any firm whose failure would pose a systemic risk [read: "too big to fail"] must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition," the Fed chairman said in a speech in March, "and be held to high capital and liquidity standards." What does the future hold? you might ask. The answer: Who's to say? But one could imagine possibilities that take us well beyond Glass-Steagall. Suppose that there were banks as large as Citi is today -- or larger. But that those banks were institutions that YOU paid to keep and protect your deposited money: "narrow" or "100 percent reserve" banks, they're called in the literature. The fabled Bank of Amsterdam was the first and foremost of the ilk back in the 1600, but it was hardly the last. Not saying that's the future. But banking reform is surely in the air. -- Posted May 26, 2009 | Comments (2) | Permalink
 TrackBacksListed below are links to blogs that reference this entry: Is There Any Talk of Reinstating Glass-Steagall?. TrackBack URL for this entry: http://www.pbs.org/newshour/mt4/mt-tb.cgi/1332 2 CommentsLeave a comment |
|
|
 |
||
|
 |
 |
|
ABOUT US |  |
FEEDBACK | |
SUBSCRIPTIONS / FEEDS: |  
| |
|
        |
|
| Support the kind of journalism done by the NewsHour...Become a member of your local PBS station. | ||
| ||
| PBS Online Privacy Policy Copyright ©1996- MacNeil/Lehrer Productions. All Rights Reserved. | ||
| ||
Dear Paul,
Good question. I am sending the following answer to the Federal Reserve. Thank you for your continuing contribution to knowledge.
Best regards,
Hugh
Subject: To Regulate Or Not To Regulate Is The Most Important Economic Question
There are primarily two ways that society learns and progresses: (1) From lessons of history and (2) From solutions of problems. The Great Depression, the Savings and Loan Crisis, and the recent Subprime Woe are example of (1), and scientific achievements are examples of (2).
Society learns lessons of history through pain and suffering. In fact, the main purpose of pain and suffering is for society, or even for individuals, to learn lessons of history. In particular, scientific progress is motivated by the pain and suffering, and defeats, in wars, and today the world has learnt, and is still learning in the Mid East, that the religion of science is more powerful, at least militarily, than most other religions and cultures.
Pain and suffering are not particularly the result of evil. Many evil persons live good lives. Pain and suffering are the result of the non-observance of non-violable laws of nature. There should be a balance between good and evil. For example, evil promotes self-interest and competition, which enhance progress, even in knowledge, and good promotes the contribution and the implementation of knowledge. Today, with excessive self-interest, knowledge takes a back seat to money and power.
There is a great deal of suffering in financial crises. Milton Friedman had learnt from this suffering, well. He promoted the Free Market (with competition and self-interest) because he wanted the invisible hand, which is a qualitative law of nature, to work without government interference. Friedman also suggested the Quantity Theory of Money (Price x Quantity = Velocity of Circulation of Money Supply x Money Supply, PQ=VM) would prevent future Great Depressions by keeping VM constant. Alan Greenspan in the S&L Crisis and Ben Bernanki in the current crisis, following the spirit of Friedman, had saved the world from another Great Depression.
I once remarked and predicted at a large lecture that after the death of Friedman the world will suffer great financial crises, when Friedman was still alive. If we go from deregulation to regulation, without Friedman personally to stop it, this prediction will become true. We need to go from Friedman to Post-Friedman, not to Pre-Friedman.
The current financial crisis is not due to companies too big to fail, but the lack of knowledge, particularly, the solution of value, which makes the invisible hand visible. The crisis occurred because the price is wrong; now the world is adjusting to the right price, without guidance of the solution of value, with a great deal of pain and suffering. Yet, the invisible hand of the Free Market should work better than the clumsy hand of the government. And the quantitative solution of value and the Quantity Theory of Money should help permanently stabilize the economy. If we do not use knowledge or (2) solutions of problems to solve our problems, (1) pain and suffering will continue.
The problem of "too big to fail" is politics, not economics. Only one business out of 100, regardless of their sizes, survives after 15 years in a competitive capitalistic free market. Many of the old companies should have failed long ago, if politicians are not allowed to accept their political donations. Large companies have rate of return less than 10%, and small businesses, 40%. Large companies will die naturally. Here Obama (previous Jerry Brown), not taking contributions from lobbyists, has set one of his most important examples for the future of politics. Thank you for your attention. ### Hugh Ching, Post-Science Institute, 5/27/2009
In capitalism, inefficiency is removed from the system when a company fails. Lehman Brothers has demonstrated that the failure of one company can trigger financial armageddon. If a company has to be bailed out, then the issue of 'moral hazard' must be addressed by regulations.
I am in total agreement that the fundamental cause of the Global Financial Meltdown was the mispricing of risk. It is important to understand how this occur in the first place. CDO, CDS and other financial instruments are created to solve an imbalance between supply and demand. Namely, there are a lot more investors looking for 'safe' investment than the existence of safe investments.
A simple reinstatement of Glass-Steagall is not sufficient. We need a central authority that monitors the entire finacial system for imbalances. It must also have the power to act to fix the imbalance. To quote from Alan Greenspan, the job will be to 'take the punchbowl away before people get too drunk'.
Whether the lobbyist will allow this is another matter.