What Was Glass-Steagall? (and why we need to bring it back)

Mack Luby, Contributor

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During his time in the senate, Sen. Bernard Sanders (I-VA) has called for the “Reinstatement of Glass-Steagall”  and to “Break up the big banks.” But what is Glass-Steagall? How is it important? And should it really be reinstated?

Glass-Steagall is an umbrella term for four provisions of the U.S. Banking Act of 1933 sponsored by former congressmen Carter Glass and Henry B. Steagall. The four provisions dealt primarily in the restriction of Commercial banks engaging in risky investments of securities with customers money; it essentially can be viewed as a separation between the investment and commercial departments of an institution.

This provision was passed alongside the U.S. Banking Act in response to the great depression in the hopes of preventing another crisis. Glass-Steagall was repealed in the 1990s during the Gramm-Leech-Bailey reforms under President Clinton as it was deemed unnecessary. Since then, we have since seen financial institutions grow and merge forming a near-monopoly of the United States’ second largest industry.

The Subprime Mortgage Crisis of 2007-2008 was a worldwide economic catastrophe which wiped out the savings and retirement of millions of Americans, and forced millions more into foreclosure and homelessness. Many believe this crisis to be a direct consequence of Glass-Steagall’s repeal. Prior to the crash, firms would invest in highly risky mortgage packages and resell them to other firms while grossly understating their risk, then betting against the bonds they just sold. Outside of misrepresenting the bonds these firms sold, everything that was done was completely in the bounds of the law. Such frivolous use of customer’s money is unconscionable, and must be stopped to spare the next generation of another financial crisis.

There are, however, some economists who believe the repeal of Glass-Steagall had little to do with the crisis. These economists claim that since some of the largest firms who engaged in such activities (such as Lehman Brothers and Merrill Lynch) had no commercial banking departments, they couldn’t have been regulated by Glass-Steagall and therefore would’ve been free to engage in these activities.

This is in-part true, however I rebuttal this argument with the sheer fact that some of the largest culprits, such as Goldman Sachs and J.P. Morgan Chase did have commercial departments. Thus, at the very least, the 2008 financial crisis wouldn’t have been as detrimental as it was had Glass-Steagall been law.

Recently, Sen. Elizabeth Warren (D-MA) and Sen. John McCain (R-AZ) introduced a bill to the senate that has gone through the banking committee that would effectively reinstate Glass-Steagall, although it is highly unlikely to pass. This may be in part to financial institutions immense amount of resources that have been used since 2008 to lobby against big reform; a true shame since many of these institutions have continued to indulge in the same risky behavior that caused the crash.

I strongly believe that without adequate reform to break up the big banks, another crisis is inevitable.

 

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