Progressives hoping for a crackdown on Wall Street in 2017 are turning to a defunct Depression-era law as their best bet, hoping that nostalgia can raise support for breaking up big banks.
Activists and Democratic candidates, including presidential hopefuls Martin O'Malley and Bernie Sanders, are pushing reinstatement of the 1933 Glass-Steagall Act, which created barriers between commercial banks with insured deposits and investment banks that underwrite and trade securities.
|'It's always seemed to me that this is kind of a strange, historically nostalgic packaging for a break-up-the-banks proposal.'|
The ploy, which is also intended to put left-wing pressure on front-runner Hillary Clinton, appeals to the populist narrative that the deregulation of the late 1990s ultimately caused the financial crisis.
"[A] lot of our focus on it has to do with the clear correlation between the repeal of its core elements in the 1990s and the direction things went up until 2008," said Neil Sroka, communications director for Democracy for America, a progressive group pushing candidates toward populist stances.
Sroka said that when "legislation that was largely preventing bank implosions for decades is repealed and then the banks implode, it's just kind of common sense that you'd go back to the core elements of the regulations that were gutted."
That is the logic behind the 21st Century Glass-Steagall Act, introduced by Sen. Elizabeth Warren, D-Mass., which would again separate commercial banks from investment banks. While O'Malley and Sanders support the effort, an adviser to Clinton told Reuters that she would not endorse it.
Warren has argued that the 2010 Dodd-Frank financial reform law does not go far enough in limiting big banks, and that its Volcker Rule provision, intended to prevent commercial banks from trading for their own accounts or owning hedge funds, is not a satisfactory substitute for Glass-Steagall.
It's an idea that has support across the political spectrum. John McCain, R-Ariz, co-sponsored Warren's bill. Rep. Paul Ryan, R-Wis., has expressed support for it in the past, as has former House Speaker Newt Gingrich. Sen. Richard Shelby, R-Ala., the chairman of the powerful Senate Banking Committee, voted against repealing Glass-Steagall in 1999.
The most fanatical supporters of the law, however, are followers of Lyndon LaRouche, the fringe perennial political candidate whose views are difficult to categorize. It was an organizer with LaRouche PAC who interrupted Clinton during a speech on the economy last week to challenge her on Glass-Steagall.
But reinstating Glass-Steagall would be difficult for the same reasons that the law fell out of favor, said Philip Wallach, a scholar at the Brookings Institution who has studied banking law and the crisis.
"It's always seemed to me that this is kind of a strange, historically nostalgic packaging for a break-up-the-banks proposal," he said.
"There's this line of argument that, 'oh, Glass-Steagall was such a simple, straightforward law and it was so easy to figure out how to enforce it ...' but that's just not true," Wallach he said. "It was very difficult to figure out which activities were core banking activities."
The Banking Act of 1933 had four provisions that prevented commercial banks from dealing or underwriting securities or owning a securities firm, stopped securities firms from taking deposits, and barred commercial banks and investment banks from sharing personnel.
But there is not a clear line between activities that should be restricted to investment banks and those that commercial banks need to engage in to serve customers. The line was blurred over the decades as new technologies and new financial practices were created.
From the 1970s to the 1990s, there was a "whittling away" of the separation between commercial banks and securities firms, said Lawrence White, a New York University economist. Regulators allowed banks to gradually enter into lines of business that fell somewhere between investment banking and commercial banking, such as advising customers on potential mergers or offering mutual funds. They were challenged in court repeatedly by investment banks resistant to competition, but were generally backed by judges who saw their rules as consistent with the law.
By the 1980s, the law was widely seen as an "anachronism," White said, and it continued to be shrunk through the 1990s, with banks allowed to buy securities firms.
The final blow came when Sandy Weill, head of insurance giant Travelers, which also owned an investment bank, moved to merge with Citicorp to create the first "financial supermarket."
Under the rules then, the new company would have had to divest itself of its insurance arm within two years. After an intense lobbying effort, however, Congress passed the Financial Modernization Act of 1999, commonly known as Gramm-Leach-Bliley, which tore down the remaining restrictions.
Gramm-Leach-Bliley was signed into law by President Bill Clinton and touted by Treasury Secretary Larry Summers, later President Obama's top economic adviser. Even at the time, liberals, including then-Rep. Sanders, voted against it warning of dire consequences.
The Volcker Rule, criticized for its complexity, has already forced some megabanks to divest in ways they might not have had to under the late-stage versions of Glass-Steagall. Goldman Sachs, for instance, spun off its proprietary trading business in preparing for implementation of the Volcker Rule.
The 21st Century Glass-Steagall Act would go far beyond that, White said, forcing, for instance, Bank of America to divest itself of investment bank Merrill Lynch.
The financial industry would survive, he said, but might not be safer. "If Glass-Steagall, with all of its pristine beauty of 1933, had still been in place, nothing would have been different" in 2008, he said.
Warren also has acknowledged that the new Glass-Steagall wouldn't prevent future crises. It "will not end too big to fail and implicit government subsidies," she said on the Senate floor, "but it will make financial institutions smaller, safer and move us in the right direction."