A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc. Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that's both simple and transformative: re- imposing sections of the 1933 Glass- Steagall Act that separated commercial and investment banking. Those walls came down with passage of the Gramm-Leach-Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain (pictured left) and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.'s acquisition of Merrill Lynch & Co. "The impact on Wall Street would be severe," Wayne Abernathy, an executive vice president at the American Bankers Association, said in a telephone interview. Resurrecting Glass-Steagall goes beyond the array of new regulatory powers that President Barack Obama has proposed to fix the financial system. It has also sparked debate among academics, regulators and legislators over whether the Depression-era law could have prevented the crisis of 2008 or might help avoid future ones. – Bloomberg
Dominant Social Theme: Bring back discipline.
Free-Market Analysis: It is fairly incredible that Congress keeps recycling the same worn out solutions to central bank monetary stimulation. We think this can only be because Congress does not want to admit that the system itself is what's at fault. Also, if you blame regulations, then you can argue over fixing regulations. Regulations are a bailiwick of Congress, so Congress is going to be a necessary and integral part of the regulatory conversation. If you are in Congress, that makes you feel good.
Now it is true that Congress can make things worse through regulations, but we have a tough time seeing how it will make things better. As we have stated before, it is central bank monetary stimulation that creates the biggest problems, not regulation. Certainly, if you didn't have central bank money stimulation you wouldn't have the terribly corrosive booms and busts that Western society suffers from now. And thus you would have less talk of "fixing" the economy with the proper regulatory patch.
Of course no one knows what this is anyway. There is no scientific methodology that allows one to create the proper regulation. Regulations, especially financial ones, are simply political horse-trading. The idea that Barney Frank, Chris Dodd et al sit down to craft the best possible bill from the standpoint of the public good is fairly risible. Here's some more from the article:
"If you look at what happened, with or without Glass-Steagall, it would have made no difference," said H. Rodgin Cohen, chairman of New York-based law firm Sullivan & Cromwell LLP, who represented one side or the other in more than a dozen transactions stemming from the financial crisis last year, including the rescues of Bear Stearns Cos., Fannie Mae, Wachovia Corp., and American International Group Inc.
Cohen and others say the law wouldn't have saved Bear Stearns or Lehman Brothers Holdings Inc., both of which were pure investment banks, from collapse. And the government would not have been able to enlist JPMorgan Chase & Co. to take on the assets of Bear Stearns or allow Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies, giving them access to the Federal Reserve's discount window.
Rather than split up banks, regulators should provide better supervision and require tougher capital requirements, said Cohen, who was also involved on behalf of banking clients in shaping the bill that dismantled parts of Glass-Steagall.
The McCain-Cantwell proposal, which has picked up four additional co-sponsors, could be considered by the Senate Banking Committee as early as January, if Senator Christopher Dodd, the Democratic chairman from Connecticut, and other members complete negotiations on a financial overhaul bill.
A similar bill has been introduced in the U.S. House of Representatives by Maurice Hinchey, a Democrat from New York. The House already adopted a measure on Dec. 11 to revamp financial regulation without Hinchey's proposal. The chief sponsor of the overhaul measure, Representative Barney Frank, has said he supports giving regulators the power to apply Glass-Steagall in individual cases. …
"Congress is at war with Wall Street," said former Fed Governor Lyle Gramley, now a senior economic adviser at Soleil Securities Corp. in New York. "They perceive Wall Street as being the root source of our financial crisis, and they want to do something to make sure that doesn't happen again."
Congress is certainly at war with Wall Street. What Congress should be at war with is the Federal Reserve, which needs to be audited and shut down. But since the Fed and Congress have been lying in the same bed together for decades, it is highly unlikely for the love affair to end any time soon. And the idea that Congress can retrofit previous regs and stick them back into the mix is questionable to say the least. End monetary stimulation through fixing the price and volume of money and you won't have these types of sustained crises – nor these regulatory conversations. Conversations that provide Congress with a raison d'etre.
It will be interesting to see what happens to the various "audit the Fed" bills now circulating in Congress. Were the Fed ever audited, one assumes the depth and breadth of favoritism and back-scratching would soon become evident. The Fed prints money – that's what it does. Congress enables it. That's what it does. The idea that a handful of men have the franchise to print money on behalf of the rest of is surely undemocratic in this day and age. Much better to try a free-market gold and silver standard that precludes favoritism and double-dealing. Financial regs wouldn't be an issue either – as they were not in the 1800s even with a state-mandated gold standard.