The case for Glass-Stegall

Anonymous1987

The Glass-Stegall Act was enforced in the US following the Great Depression. The main function of this legislation was to divide the commercial and investment arms of the banks, essentially banks had to decide whether to specialise in investment or commercial banking. Later an extension of the legislation divided insurance from the banking sector. This acted in such a way so as to keep financial institutions from developing too large as before investment arms of banking institutions could draw on funds from their commercial and insurance arms. The act was repealed in 1999 and lead the way for the development of individual banks to become increasingly larger through diversification between the commerical and investment sectors however the banks also grew in systematic importance to the financial system most notably Citigroup. It has been suggested that the removal of GS legislation may have exacerbated the financial crisis in 07/08.

I thought it might be an interesting topic to discuss and it would give something specific for the pro and anti regulation camps to focus on. Personally I would be pro GS as a means of reducing the effects of financial bubbles on the economy.

Background information:

http://en.wikipedia.org/wiki/Glass_stegal

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

http://www.investopedia.com/articles/03/071603.asp

http://www.nytimes.com/2008/09/13/opinion/13gruver.html?_r=1

http://www.marketwatch.com/story/would-glass-steagall-save-the-day-from-credit-woes

Flamed Diving

Without stating too much, the foundation of my support for the return of such an act is to protect peoples savings from speculation. If people wish to invest their money in capital markets, they do so knowing the risk involved. However, I don't accept that ordinary savers should face the same risk, hence I believe that traditional banks should rely on their net interest margin and fees/misc to generate profit.

eamonnm79

It would be a good start.

But what will the fallout be of doing it now?
If companies had to legally split then wouldnt they have to make an attempt to value their assets. Thus showing up their insolvency?

Time Magazine

Enter Tyler.

eamonnm79

Personally i dont think there is much doubt about the need to have more stringent regulation.
Its just the timing of it and any unforseen side effects that would worry me.
Comments such as "Citigroup became what it is today, for instance, because of the Act." seem to make less sense now than when the article was written.

In short Financers cant be trusted to do the right thing like they are some kind of benevolent force of nature.
Phil Gramm And Alan Greenspans desire for mass deregulation seems misguided at best in current climates.

Anonymous1987

Ok having read a little more into GS, I have to say its

Anti Regualtion camp 1
Pro Regulation camp 0

Seriously though the finance industry underpins the functioning of the economy itself and as such it demands close regulatory oversight and tranparency. The crisis is increasing the consolidation that was already occuring in the industry leading to a growing number of banks that are of systematic importance to the economy and the moral hazzard that develops with that. The nature of the industry is based on speculation so I guess we can't really insulate ourselves too much but there is defintely room for greater transparency particulary on a global scale.

Minder

Interesting and timely opinion form Elliot Spitzer...

July 14 (Bloomberg) -- Eliot Spitzer, the former New York governor and attorney general, said U.S. banks made a “bloody fortune” while receiving taxpayer money without a proven benefit to the wider economy.

Politicians understand the “populist rage” with excesses in the financial industry and in this case the “public is right,” Spitzer said in a Bloomberg Television interview today. “We have saved financial services, we have not created a single job. We are still bleeding jobs.”

As New York attorney general, Spitzer was known as “the sheriff of Wall Street.” He changed business practices and collected billions of dollars in settlements from financial corporations such as Merrill Lynch & Co., American International Group Inc. and Marsh & McLennan Cos. He later became governor, resigning in March 2008 after he was identified as a client of the Emperors Club VIP, a high-priced prostitution ring.

Spitzer said rules proposed by President Barack Obama’s administration are irrelevant because agencies failed to enforce existing regulations.

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

“You don’t need new regs to do it, you just need the will to do what they were supposed to do,” he said.

Former Federal Reserve Chairman Alan Greenspan had “avowed a theory of hands off” and didn’t consider himself a regulator, Spitzer said.

“What we’re seeing now is a new regulatory spirit,” he said.

Spitzer said the lessons of the financial crisis will only be remembered over a short period of time.

“Over and over we fall into the same trap,” he said. “Ten years from now we will have forgotten.”

Anonymous1987

Minder wrote: »

Interesting and timely opinion form Elliot Spitzer...

I think thats probably hitting more at the root of the problem alright, a lot of the regulation is there its just not being enforced. A prime example being the SEC failure to spot Bernard Madoff earlier despite numerous tipoffs.

Hasschu

Interesting thread related to this topic.
http://business.theatlantic.com/2009/07/exclusive_interview_what_is_shadow_banking_and_how_did_it_fail.php