Reinstate Glass-Stegall!

I mentioned this before, but I really want to stress that “financial reform” is completely meaningless without reinstating the Glass-Stegall Act. Enacted in 1933 and foolishly repealed in 1999, Glass-Stegall drew a firm line between commercial and investment banks and prohibited the “securitization” that lay at the heart of this crisis. Previously, “commercial” banks – ones in which you deposit your paycheck and which might later loan you money for a house or car – were completely separate entities from “investment” banks – ones that invest your money in whatever way they see fit. Commercial banks were low risk, low rate-of-return, while investment banks carried a higher risk, but with more earning potential. When current Economic Council Director Larry Summers chose to repeal Glass-Stegall back in 1999, he abolished the distinction between commercial and investment banks, allowing erstwhile “safe” organizations to make wildly irresponsible bets and grow so intertwined that they eventually brought the whole system down. Repealing Glass-Stegall created the “Too Big to Fail” banks.

The famous Elizabeth Warren, Paul Vlocker, and even John McCain (whose chief adviser’s name is on the G-S repeal) have come out in favor of reinstating Glass-Stegall. All the “too big to fail” banks are now even bigger, and this is largely because legislation which was traditionally used to keep them from conglomerating was idiotically repealed. This is the biggest one thing Congress can do right now to prevent the need of a future bailout. It would be so easy – they could do it tomorrow! The legislation is already written; all they have to do is sign it.

Sens. John McCain and Maria Cantwell have done a great service by recently proposing a Glass-Stegall reinstatement in the senate last month, but the bill doesn’t seem to have much support. This is totally baffling to me. The only reason I can think why the Senate wouldn’t do this right now is the massive donations they would have to sacrifice. Predictably, all the financial institutions, from Bank of America to Goldman Sachs, are vehemently against Glass-Stegall, as it would require them to break up, and likely diminish their ludicrous profits. Hence in the Bloomberg article you can hear Senators conceding that the bill “makes a lot of sense”, but “[they] don’t know if it’ll ever happen.” Uh…

The toll-free numbers for the Congressional switchboard are: 1-877-851-6437, 1-800-828-0498, or 1-800-614-2803. I think this is one issue where calling your congressman could conceivably sway them. Congress bows to the financial industry only insofar as its money can help them get elected. Public outcry can influence our legislators on legislation as specific as this. Remember, the TARP bailout originally failed in the House because their switchboards lit up with calls from angry voters.