Elizabeth Warren Introduces 21st Century Glass-Steagall Act … At today's Senate Banking Committee hearing, Elizabeth Warren introduced the 21st Century Glass-Steagall Act of 2013, co-sponsored by Senators McCain, Cantwell, and King. This new bill mirrors the original 1933 Glass-Steagall Act, which separated traditional banking activity (like checking and lending) from the riskier activity investment banking (like derivatives). The original law was repealed in 1999 by the Gramm-Leach-Bliley Act, though Glass-Steagall had been eroding for years leading up to that point. Gramm-Leach-Bliley, along with several laws passed during that era, allowed the big banks to transform into megabanks, creating "too big to fail." – TooBigHasFailed.org
Dominant Social Theme: We need to use government force to ensure fairness for all.
Free-Market Analysis: This article is posted over at TooBigHasFailed.org, a website that parallels official positions such as those taken by Elizabeth Warren (see above) and Kansas City Federal Reserve Bank President Thomas M. Hoenig, who has written a white paper entitled "Too Big Has Failed."
Again … Hoenig, who has written a paper on the theme of "breaking up" big banks, is a Fed official. Elizabeth Warren is a US senator. We are to believe that two such individuals, no matter how august, represent the kind of radical reshaping that is necessary to fix today's current financial system?
Hmm. We would suggest that the Fed itself should be radically diminished or done away with. And the Senate is in need of a drastic overhaul, as well, with only about 10 percent of US citizens now believing it is doing a good job.
Either of these actions might have more of an impact than resuscitating Glass-Steagall, but nonetheless, that is what Senator Warren has in mind. Here's more:
After all, the three biggest banks (Chase, Bank of America, and Citi) are all bloated conglomerate banks that have enormous traditional and investment subsidiaries, so these banks wouldn't be able to continue as they're currently instituted under the new Glass-Steagall Act.
Instead these megabanks would be broken up into much smaller firms. What's more, the new Glass-Steagall Act will make it so banks cannot gamble with derivatives using depositor's money, as they do today.
Currently, depositors at banks like Chase, Bank of America, or Citi implicitly use their money to help these banks make amplified bets that have the potential to cause another global meltdown. Reintroducing Glass-Steagall will make it so depositor's money cannot be used for the derivatives market. This would be a major step toward restoring sanity to Wall Street.
Not so fast. A major step in reinstating sanity on Wall Street would be to radically shrink the regulatory nimbus that supports the current securities regime, both private and public. In a sense, competition has been relentlessly stripped out of the investment industry.
Funds for the most part replicate the same strategies. Bankers pitch the same – regulated – products and government generally looks out for powerful parties and reliquifies them when they've sunk their capital into the wrong instruments.
The simplest way to break up big banks is to stop supporting them when they turn up bankrupt. Reinvigorate risk and make sure those involved suffer personal and professional consequences – mainly the loss of capital – when they make investment mistakes and you wouldn't have to be worried about "big banks" for long.
Unfortunately, we're headed toward reregulation rather than real and significant deregulation. And this is being hailed by the "putative" left and social reformers generally as a step forward.
Pardon us, but reregulation supported by senators and Federal Reserve officials doesn't strike us as nearly radical enough, nor will it prove exceptionally efficient at doing anything other than reinforcing the status quo.
Let the Invisible Hand operate. What's so complicated about that?