At Occupy Wall Street rallies in New York’s Zuccotti Park back in September 2011, Akshat Tewary noticed that many protesters were calling for the reinstatement of the Glass-Steagall Act, the Depression-era law that separated investment and commercial banking. As an administrative lawyer, Tewary knew that financial regulators are required to consider input from the public. To make sure these regulators heard the views of Wall Street critics — not just financial industry boosters — he helped organize a loose group of protestors under the name “Occupy the SEC.”
Since 2011, this group has generated a steady stream of letters to regulators, amicus briefs to the U.S. Supreme Court, and petitions to Congress on Glass-Steagall and other aspects of Wall Street reform. Today, five years after the birth of Occupy, both the Democratic and Republican Party platforms now call for the reinstatement of Glass-Steagall. Inequality.org co-editor Sarah Anderson asked Tewary for his reaction.
Sarah Anderson: What do you think about both party platforms calling for a new Glass-Steagall?
Akshat Tewary: It certainly comes as a surprise. The Republicans have stymied and rejected recent attempts by progressive legislators like Elizabeth Warren and Bernie Sanders to reinstate Glass-Steagall. The Republican-led House Financial Services Committee is famously bank-friendly, and has recently championed the repeal of financial reform laws like the Dodd-Frank Act. So at some level, the inclusion of Glass-Steagall in the Republican platform seems utterly bizarre.
Even so, a closer analysis shows that maybe this is much ado about nothing. Party platforms are routinely ignored by incumbent Presidents: Bob Dole famously admitted that he never read the Republican convention’s platform when he ran for President in 1996. The mere fact that the law is on the platform does not mean that the law will actually become a campaign priority in Congress later this year.
Banks hold inordinate sway with mainstream Republicans, and you can bet that they would never take a renewed Glass-Steagall bill lying down. Powerful bank lobbyists would inveigh against the bill to such an extent that it would never receive serious consideration among mainstream Republicans.
Even if the Republican Party lacks a real appetite to resurrect Glass-Steagall, there are a number of strategic reasons for the party to include the law in its platform. A certain segment of the Republican Party reflects populist angst against big-wig corporations that are seen as having bought the political system. A few early contenders for the Republican Presidential ticket (like Mike Huckabee and Ben Carson) even advocated for Glass-Steagall, probably in an attempt to tap into that populist angst against Wall Street.
Similarly, in 2013 Republican Senator John McCain joined Senator Warren and others in championing a reboot of the law called “The 21st Century Glass-Steagall Act.” In my view, the inclusion of Glass-Steagall on the Republican platform is a classic bait and switch tactic — the party is seeking to curry favor with the minority of Republican Party members who strongly oppose Wall Street’s influence. Glass-Steagall will not get serious Republican consideration in Congress, but its mention on the platform will serve to attract a larger segment of Republicans and Independents who might otherwise vote for a centrist Hillary Clinton.
Hillary Clinton has been outspoken in her opposition to the Glass-Steagall Act. In an op-ed in the New York Times she claimed that shadow banking, not Glass-Steagall, should be our real concern. And it was her husband who presided over the law’s repeal in 1999. So the Republicans may have included Glass-Steagall on their platform as an additional way to distinguish themselves from Clinton during campaign season.
The inclusion of the Glass-Steagall Act on the Democratic ticket is also somewhat surprising. As I mentioned, Hillary Clinton has been vocal in belittling the law. And Senator Warren’s 21st Century Glass-Steagall Act has only received tepid support from Congressional Democrats thus far. Of course, Bernie Sanders was an ardent champion of bringing back Glass-Steagall, but he’s no longer in the race. So here too this is most likely an attempt to garner support from more populist elements in the party, even if more centrist party leaders find it unpalatable in fact.
Why is this reform important?
Glass-Stegall would force retail banks to disassociate themselves from their investment banking, insurance and broker-dealer affiliates. This is a vital reform that could help avert the next financial crisis.
The simple fact is that the half-century between the law’s passage in 1933 and its repeal in 1999 saw the greatest economic progress in American (and possibly world) history. The passage of the Glass-Steagall Act was the denouement of Congress’s attempts to understand the causes behind the Market Crash of 1929 and the consequent Great Depression.
The Congressionally appointed Pecora Commission found that rampant speculation on Wall Street created a financial bubble produced by excess liquidity in the market. Banks had utilized their special access to capital — access to depositors’ funds and the Fed’s discount window — to churn the markets with speculative risk. This led to the worst economic crisis in modern history: the Great Depression.
Unfortunately, since the repeal of Glass-Steagall in 1999, banks have once again moved away from “boring banking” services that benefit the public (i.e. taking deposits and making loans at reasonable rates), and have instead moved towards speculative trading and fee-generating services that enrich the few while putting the public at risk.
Just as the Pecora Commission found that Wall Street speculation caused the Great Depression, in 2011 the Financial Crisis Inquiry Commission found that speculation on Wall Street helped cause the 2008 meltdown. A renewed Glass-Steagall Act would prevent yet another repeat of such a scenario.
Banks have ready access to financing that is simply not available to other businesses. For example, the Government Accountability Office reported that between 2008 and 2010, the Federal Reserve made available to banks nearly $16 trillion in essentially zero-percent loan facilities.
Main Street business have never been able to receive anywhere near that kind of capital. Historically, banks have been given access to this liquidity under the theory that they will spread that liquidity to the rest of the market. Unfortunately, since the repeal of Glass-Steagall banks have proven adept at making money for themselves, even as they draw liquidity away from Main Street businesses and people.
Instead of utilizing their size and funding advantages to make loans to businesses, banks have been focused more on creating mind-numbingly obscure derivatives and other “financial innovations” in an effort to enrich themselves through fees and spreads. A renewed Glass-Steagall Act would redress this wrong by forcing retail banks to divest themselves from their investment banking and trading affiliates. On the one hand, retails banks would be forbidden from speculating at all. And divested investment banking units could continue to do business as usual, but their global impact would be mitigated because they would be smaller in size.
A new Glass-Steagall Act would also help address our country’s Too Big to Fail problem. If banks were Too Big to Fail in 2007, they are undoubtedly more so today. The country’s biggest banks are now bigger than ever. The six biggest banks enjoy a combined $10 trillion in assets. By way of comparison, the U.S. GDP is $17 trillion. The crisis of 2008 taught us that when banks are gargantuan in size, they become ticking time bombs that threaten the global economy.
The Dodd-Frank Act contains various half-measures, like the Volcker Rule, living wills, and resolution authority, that seek to address the Too Big to Fail Problem. But the efficacy of these provisions is questionable. Virtually every aspect of Dodd-Frank has been challenged at the agency level, and much of the resultant regulation has been severely watered down and delayed through bank lobbying. To make matters worse, various parts of Dodd-Frank have come under the Congressional chopping block since 2010 (and will continue to do so in the future).
While Dodd-Frank contains many important financial reforms, it adopts a Whack-a-Mole approach that puts regulatory band-aids over old problems, while doing little to address new problems. Only bold, systemic reform like Glass-Steagall can truly mitigate the risks posed by Too-Big-to-Fail banks.
How would this reform affect ordinary Americans?
Too Big to Fail banks helped cause the last financial crisis. As we all know, all Americans — not just bank employees — felt the impact of that crisis. Between 2007 and 2010, median U.S. family wealth dropped a jaw-dropping 40 percent. The size and interconnectedness of the nation’s gargantuan banks all but ensured that a discrete banking crisis would translate into a world-wide, general economic crisis. A new Glass-Steagall Act would help avoid a repeat of this scenario.
That law would force our nation’s behemoth banks to divest themselves into smaller, manageable units. In doing so, the Act would reduce the chances that the failure of one bank would cause the failure of other, unrelated businesses. As a consequence, ordinary Americans would be spared the burden of losing wealth and income simply because of the failure of one, or a handful of financial institutions.
How would it affect community banks?
Community banks have much to gain from a new Glass-Steagall. At present, the financial services industry suffers from an oligopoly condition whereby a handful of institutions with inordinate market power are able to set prices and offer services in a manner that maximizes profit for the institution, but extracts value from the broader economy. Community banks simply cannot compete under these anti-competitive conditions, which is why we are seeing that smaller banks are merging into bigger ones at unprecedented rates.
Under Glass-Steagall, giants like Bank of America and Citigroup would have to spin out their retail services into smaller retail-only banks. Those smaller units would no longer control the market, thereby allowing community banks to become relatively more competitive. Classical economic theory tells us that efficient markets feature many small firms, rather than a handful of big ones. By cutting oversized banks down to size, Glass-Steagall would push the retail banking industry towards greater efficiency.
What are other Wall Street reforms that should be top priorities at the moment?
Too Big to Fail remains a fundamental problem in the economic system, and a new Glass-Steagall would go a long way towards addressing that problem. That said, the need for financial reform is not limited to the banking industry.
For example, the so-called “shadow banking” sector is also in need of serious reform. Hedge funds, credit funds, and other small financial institutions can allocate or mis-allocate large amounts of capital that can have serious systemic effects. This can occur as the result of individual decisions or because of herding behavior across the industry.
Regulators need to expand the applicability of Title II of the Dodd-Frank Act to cover additional players with inordinate market impact. For instance, in 1998 a hedge fund called Long Term Capital Management nearly brought the financial sector to its knees. The 2016 version of LTCM would certainly not fall under the current version of Title II, and would likely escape regulatory scrutiny. While much has changed since 1998, what remains true is that single, small actors can continue to cause havoc in the industry. The “Flash Crash” and various “fat finger” market crises attest to that fact.
More generally, our policy platform seeks to bring about the following long-term reforms:
- providing income support to workers and communities
- creating conditions for workers’ wealth and eliminating unnecessary private debt
- democratizing the economy for the 99% through measures such as public banking
- promoting social ownership of enterprises and housing to yield more economically efficient and equitable outcomes
- transforming banking systems to avoid another financial crisis
- eliminating the control of economic resources by the 1%.
What would you like the financial sector to look like in 20 years?
It’s anybody’s guess as to what the future holds, but what’s clear is that the mistakes of the present yield the regrets of the future. The country must adopt bold financial reforms like a renewed Glass-Steagall Act if it wants to avoid another financial catastrophe like the Great Recession of 2008.