Former Secretary of State Hillary Clinton has rejected the hard choice of reinstating the Glass-Steagall Act to rein in Wall Street. (Photo: Mike Mozart)
On October 9, 2015, Mark Karlin writes on Buzzflash:
Amidst the announcements by former Secretary of State Hillary Clinton that she officially opposes the northern sector of the Keystone XL pipeline and has taken a position against the Trans-Pacific Partnership, there has been little discussion of Clinton’s announcement that she is opposed to the reinstatement of the Glass-Steagall act.
The infamous repeal of the Glass-Steagall Act occurred during the waning days of the Bill Clinton administration, with his full support. The law, according to Investopedia, was “an act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business.”
As an analysis of Clinton’s position by journalist Dylan Stableford of Yahoo! Politics states:
The Glass-Steagall Act, passed in 1933, prohibited commercial banks from participating in the investment banking business and created the Federal Deposit Insurance Corporation (FDIC) to protect bank deposits from institutional failure. But major provisions of the law were repealed in 1999 under President Bill Clinton, a move some believe contributed to the 2008 global credit crisis because commercial banks – now free to invest in things such as real estate – were saddled with billions of dollars in losses tied to cratering U.S. home prices. Several lawmakers on both sides of the aisle have called for the reinstatement of the law to make “too-big-to-fail” banks much smaller, minimize risk and prevent such a crisis from happening again.
An onslaught of critics have blamed the repeal of the Glass-Steagall Act for the 2008 US economic implosion, the bailing-out of banks with billions and billions of taxpayer dollars, and the ongoing fraud and illegal behavior of many large banks. Clinton, however, says that she has a better prescription to cure Wall Street misbehavior.
In an op-ed printed in Bloomberg Views on October 8, Clinton spelled out her plan to rein in Wall Street:
“Seven years after the financial crash, despite important new rules signed into law by President Barack Obama, there are risks in our financial system that could still cause another crisis. Banks have paid billions of dollars in fines, but few executives have been held personally accountable. “Too big to fail” is still too big a problem. Regulators don’t have all the tools and support they need to protect our economy. To prevent irresponsible behavior on Wall Street from ever again devastating Main Street, we need more accountability, tougher rules and stronger enforcement. I have a plan to build on the progress we’ve made under President Obama and do just that….
“One serious approach being advocated is to pass an updated Glass-Steagall Act, separating commercial and investment banking, to reduce the size of the banks and the risk of a taxpayer bailout. I certainly share the goal of never having to bail out the big banks again, but I prefer the path of tackling the most dangerous risks in a different way.”
Some of the proposals in Clinton’s op-ed are steps forward, including a tax on high-frequency trading, enforcement of the Volcker Rule (which limits speculative investments), and “a new fee on risk that would discourage the type of excessive leverage and short-term borrowing that could spark another crisis.”
Clinton makes a few other promises to hold financial firms accountable for gambling with the US economy, but one has to ask: Why she wouldn’t want to add those measures onto an enhanced Glass-Steagall Act?
Perhaps that is because the repeal of Glass-Steagall is the keystone that allowed Wall Street to become a hydra-headed monster of financial manipulation, and any effort to reinstate it fills the titans of the financial world with frothing dread. Clinton’s proposals rely heavily on the promulgation of regulations and regulatory enforcement, as well as serious prosecution from the Department of Justice (which let banks and bank executives off with a relative slap on the wrist under Eric Holder’s tenure as attorney general). Under the Obama administration, there’s been a lot of rhetoric in support of regulatory action to limit financial malfeasance, but far too little action.
Clinton claims to “have what I consider to be a more comprehensive approach [than Glass-Steagall] to what we need to do to rein in these institutions, including the big banks.” In short, Clinton, who has been a favorite of Wall Street donors since her days as a senator representing New York, is asking voters to trust that she will seriously take executive action against her dear friends and champion donors. The Obama administration, however, has shown how easy it is to ignore matching enforcement to promises of getting tough.
Will the Wall Street money keep flowing to Hillary Clinton despite her claim that she will clamp down on financial chicanery? It sure looks like it will if you agree with CNN Money’s October 8 article that asserts “Wall Street isn’t worried about Hillary Clinton’s plan:
“Hillary Clinton unveiled her big plan to curb the worst of Wall Street’s excesses on Thursday. The reaction from the banking community was a shrug, if not relief.
“While Clinton proposes some harsher regulations, she stops far short of what more populist Democrats likeBernie Sanders and Elizabeth Warren want to do to Wall Street.
“‘We continue to believe Clinton would be one of the better candidates for financial firms,” wrote Jaret Seiberg of Guggenheim Partners in a note to clients analyzing her plan.Sanders and Warren think the big banks should be broken up. Clinton does not. It’s a big divide in the Democratic party….
“‘To us, [Clinton’s] overall plan demonstrates an understanding of the financial system that we have not previously seen on the campaign trail,’ Seiberg wrote.”
Some may argue that Clinton, who supported the northern section of the Keystone XL pipeline as secretary of state, only changed her position now because she needs to appear more progressive. Some may also argue that Clinton – who was supportiver of the Trans-Pacific Partnership as secretary of state and in her gook Hard Choices* – came out against it recently to keep Bernie Sanders from using it as an issue in the first Democratic debate next week. Opposing the TPP might also serve to differentiate Clinton from potential primary opponent Joe Biden, who has to support the TPP because he is vice president in an administration that is pushing for its congressional passage. (Of course, some might consider those assessments of Clinton’s position changes cynical.)
On Glass-Steagall, a reversal might not be so simple for Clinton. On July 21 (before the Clinton Wall Street plan was formally announced), a CNBC article noted that “Clinton rakes in Wall Street cash amid tough talk:
“Clinton still attracts Wall Street money. Because she was a New York senator, she maintains an “institutional connection” to the financial industry, said Lisa Gilbert, director of the Congress Watch division at Public Citizen.
“Clinton acknowledged that relationship in a speech last week, giving a nod to the what she deemed the financial industry’s positive role in the economy.
“‘As a former senator from New York, I know firsthand the role that Wall Street can and should play in our economy,” Clinton said, “helping Main Street grow and prosper and boosting new companies that make America more competitive globally….'”
In the speech CNBC quotes from, Clinton did acknowledge that Wall Street needed a bit more regulation to ensure that risk-taking did not cause a repeat of 2008.
Nevertheless, the former New York senator will likely continue to receive Wall Street campaign funding, because she does not support the reinstatement of the law – The Glass-Steagall Act – that would chop off the arms of the menacing financial octopus that was created as a result of its repeal.
This is the position of the Center for Economic and Social Justice (www.cesj.org), which I am associated. Before the Crash of 1929, commercial and investment banking were linked. That meant that stock brokers in an investment bank could go to the related commercial branch and have the commercial branch create money to loan to an investor, sometimes with as little as 3% down.
This resulted in massive money creation that fueled speculation on Wall Street, driving up the prices of shares to unheard-of heights. When people realized there was nothing behind the rise in share values except private sector debt backed by the rise in share values, the stock market crashed.
To correct this and prevent it from happening again, Senator Carter Glass of Virginia (who had been instrumental in the passage of the Federal Reserve Act of 1913) and Representative Henry B. Steagall of Alabama insisted on provisions in the Banking Act of 1933 that separated commercial and investment banking. There were, unfortunately, some loopholes, especially those that permitted money creation backed by government securities (or, more accurately, didn’t prohibit it), but by and large Glass-Steagall effectively instituted solid principles of internal control into the financial services industry.
In the 1980s efforts began to repeal Glass-Steagall, which was accomplished in two phases. The first resulted in the savings and loan debacle, and the second led directly to the home mortgage meltdown.
The current wild fluctuations in the stock market are, in a sense, not directly related to the repeal of Glass-Steagall, as they are funded largely by government instead of private sector money creation. The lack of separation of function between investment and commercial banking makes this easier, but that is all. Commercial banks are channeling funds to speculation instead of using their money creation powers backed up by the Federal Reserve to finance private sector investment in new capital.
That is why sound principles of internal control would mandate not merely a separation of investment and commercial banking again, but also mandate that financial institutions of all types stick strictly to the purpose for which they were instituted. A commercial bank would make commercial loans, a savings and loan would make consumer loans, an insurance company would offer only insurance, an investment bank would mediate between stock issuers and stock purchasers, and so on.
Above all, there would be no creation of money backed by government debt. If a government borrows, it must be out of existing savings. The only reason the Federal Reserve was permitted to deal in government securities on the open market was to retire the debt-backed United States Notes, National Bank Notes, and Treasury Notes of 1890, and replace them with Federal Reserve Notes backed with private sector hard assets.
The bottom line here is that if proper internal controls are in place, it is no longer a question whether the government or the banks are creating too much or not enough money for non-productive spending and speculation. The question answers itself, because the system would prohibit ALL new money creation except that which is backed by non-speculative, private sector hard assets. Governments, like the rest of us, would have to learn to live within their means, meaning what can be raised by taxation, not issuing government debt-backed funny money.
To ensure the viability of such a move, it would have to be linked to an aggressive program of expanded capital ownership, such as Capital Homesteading, increasing the number of capital owners, rebuilding the tax base, and decreasing the need for massive government entitlements.