There has been a recent push by Wall Street’s defenders to undermine public support for the return to Glass-Steagall, the Depression era law which banned federally insured commercial banks from doing investment banking. The issue has come to light following the JP Morgan Fail Whale trades and the recognition that even the weak Volcker Rule in Dodd-Frank would be insufficient restraint for banks which failed to learning anything from the 2008 financial collapse (well, other than both political parties will bail them out with no change in behavior expected in return).
Aaron Ross Sorkin of the Times’ Dealbook does the yeoman’s work for Wall Street, pushing a bogus attack on Glass-Steagall. Sorkin’s argument is that the collapse was driven by investment bank failures and had nothing to do with commercial banking, therefore there is no need to separate risky investment banking from commercial banking:
But here’s the key: Glass-Steagall wouldn’t have prevented the last financial crisis. And it probably wouldn’t have prevented JPMorgan’s $2 billion-plus trading loss. The loss occurred on the commercial side of the bank, not at the investment bank.
But this isn’t the point and Dean Baker nails Sorkin on it.
The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.
Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government guaranteed deposits then there should be restraints on the sort of risks you can take.
Americans for Financial Reform gets at the restraints on risk as well:
Problems in the mortgage market triggered the collapse because of a vast structure of financial market trades based indirectly on the value of those mortgages. That structure included trillions of dollars in synthetic derivatives bets (synthetic CDOs), as well as trillions of dollars in short-term (overnight) funding tied directly to traded valuations. That was the structure that collapsed and took the economy down with it.
Second, no one is trying to – or could – ban risk from banking. The goal of the Volcker Rule is instead to change the form and location of risk. The rule moves one particular type of risk –proprietary speculation in the financial market ‘casino’ – out of the giant banks at the center of the economy and into smaller hedge funds and other speculators who can fail without threatening the system. The Volcker Rule permits banks to continue risk taking in the form of lending and investment, as well as low risk forms of market making.
There’s pushback by Wall Street allies on both the Volcker Rule and Glass-Steagall because Wall Street was caught with its pants down on the Fail Whale trade. The Volcker Rule is weak and not even in effect, but Wall Street has spent months and millions of dollars lobbying for its repeal. Want proof that the push back is about repealing pending regulations? Look no further than what one Wall Street lobbyist told Politico:
How much has the JPM trading loss changed the lobbying landscape around Volcker and the rest of Dodd-Frank? One top industry hand told M.M. last night: “It just blew up everything I’ve been working on.”
Get that? The Fail Whale exposure has caused it to become harder for Wall Street lobbyists to get Congressional members, staff and regulators to go along with the gutting of regulations which haven’t even been put in place yet. Thus we see Sorkin out to carry water for those who want to make regulation of the banking industry irrelevant. I will say this about the banksters, they don’t have an ounce of shame.