Bernie's Dystopia: Part II or the Glass-Steagall Act

Desperate times call for desperate measures.  October of 1929 saw the Stock Market crash, followed by a succession of bank failures and the start of the Great Depression.  As if nature didn’t think man had done enough to man, there was also the Dust Bowl, the loss of subsistence family farms and the migration of the farmers to California.  Probably the only good things to came out of this monochromatic gray landscape of misery were John Steinbeck’s book The Grapes of Wrath and a redirection of America’s legislative outlook.  While The Grapes of Wrath is so painfully beautiful to read that everyone should take it up—just once (!)—the legislation needs to be revisited on a regular basis.  It is not painfully beautiful.  Legislation is not supposed to be beautiful, it is supposed to be functional and functionality changes with time and circumstance.

Enter the Banking Act of 1933, commonly called the Glass-Steagall Act.  This was signed within days of President Franklin Delano Roosevelt taking office in March, 1933.  Action that fast clearly marks “emergency” legislation.  It’s first purpose was to do something—anything—to start the long march back to some popular confidence in the country’s failed and flailing banking system. 

The primary purpose of the Glass-Steagall Act was to separate commercial banking from investment banking.  Commercial banking is that which takes in deposits and makes loans.  Investment banking underwrites and deals in securities, buying and selling them, or insuring them for customers, all for a small fee. [J. P. Morgan usually underwrote securities for 1%, a miniscule penny on the dollar, but the dollars mounted up.]  According to the law, investment banks could not have close associations with commercial banks: no overlapping directorates or common ownership.  Supposedly this protected the commercial banks and their “every man” customers from devastation if the investment banking operation collapsed under the constant gamble of loss vs gain that is the heart of investment. 

Commercial banks were still allowed to have 10% of their total income from securities and they could underwrite government bonds.  Glass-Steagall also created the FDIC, an important insurance policy for the small banking customer.   In 1933 there was little that was controversial in any of this legislation.

By the 1990’s with a world heading toward global industry and instant communication (the trip to the bank has been replaced with a keystroke on your computer or a swipe of a card from the privacy of your car) banks were growing in function, while shrinking in number.  Commercial banks had fallen from 14,000 to 9,000.  But their size had increased.  So had their function.  Banks were now engaging in both investment banking (underwriting stocks and bonds) and insurance.  To oversee this expanded business, the Gramm-Leach-Bliley Act was passed and signed by President Clinton in 1999. 

This law allowed the creation of Financial Holding Companies.  These FHC’s essentially acted like a good bra, they would lift and separate the functions of banks into discrete cups, each ogled (supervised) by the Fed.  If you like being able to bank, invest and get your credit cards, all from one bank, you like FHC’s.  If they are broken up, you and those banks are going to have to decide which function they want to keep.  I can promise you they will keep the one that is most profitable to them.  You will get what is left over. 

These banks are currently regulated and responsive to a global economy.  Does a 1933 model of good banking seem like a good idea? 

Remember Mr. Potter in It’s a Wonderful Life and keep the faith.