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Philosophy Behind Glass-Steagall Repeal Needs Reform

August 29, 2012 By Héctor García, Fellow

"If I see further, it is because I stood on the shoulders of giants,” Sir Isaac Newton

Restoring the Glass-Steagall Act, which would limit relations between commercial banks and securities firms, was proposed by FDIC director Thomas Hoenig. The initiative received surprising support from former CEOs of Citicorp, John Reed, and Travelers Group, Sandy Weill, who contributed significantly to repealing the Act and who have acknowledged their error.

Reed told PBS's Bill Moyers that he, Weill, then-Federal Reserve Chair Alan Greenspan as well as many in government and the media were carried away by “exuberance.” In the end, repealing Glass-Steagall wound up cost trillions of dollars to international economic growth as well as the loss of 40% of American families' net worth. Opposition voices, such as North Dakota's Senator Byron Dorgan, who foresaw the consequences, were silenced in the rush to the accumulation of enormous wealth.

Critics of the call to reinstate Glass-Steagall correctly point out that, even if the Act had not been repealed, the financial crisis of 2007 would still have happened. The no-documentation and lo-documentation mortgage loans, the securitization of those loans, the growth of derivatives trading far beyond the needs of the real economy, which turned the financial markets into international high-stakes gambling, would probably still have caused the recession and the deterioration of global trust in governments and financial institutions.

If Glass-Steagall were to be revived today but the above mentioned philosophy were to remain, the expected rekindling of the financial and economic crises would probably occur in a different form. It is a change of substance not a change of form that is needed—“a culture shift in the financial world,” as recommended by CFTC member Bart Chilton.

It is human to err but essential to learn from our errors. Many seem to be avoiding the lesson and, worse, to be justifying the error. Claims are being made by some leaders that the recession was due to excessive regulation by government and that financial institutions and corporations need a freer hand to act in exclusive self-interest.

Unfortunately, the public has a short memory and to few media outlets have the expertise and resources to do in-depth investigative reporting. Consequently, “staying on message” is effective regardless of whether the message is based on reality or not. Many are choosing consciously or unconsciously to be in denial of the overwhelming evidence that the lack of balance between the interest of the commonwealth and individual interest has wreaked havoc on the majority of the people and on democracy.

U.S. Senator Bernie Sanders testified before a Senate Judiciary Subcommittee last July on Taking Back Our Democracy: “Today, the top one percent own 40 percent of all wealth, while the bottom sixty percent owns less than 2 percent. Incredibly, the bottom 40 percent of all Americans own just 3/10 of one percent of the wealth of the country.”

A winning-is-the-only-thing philosophy might work in sports but it does not work in our complex reality. The Great Depression, which led to the creation of the Glass-Steagall Act, the S&L crisis of 1989 and the financial crisis of 2007 were largely caused by excess but not excess of regulation.

Minnesotans might not be able to significantly influence the return of the Glass-Steagall Act but we could launch an initiative to reverse the philosophy that led to the repealing of the Act. Minnesotans can, from the ground up, exemplify self-restraint, civic-mindedness, transparency and ethics in the use and offerings of financial services. One institution at a time, one client and one day at a time, the Northern Star state can lead the way to a culture-shift in the financial world that might bring back Glass-Steagall or perhaps something better.

This is a land of giants—Chief Wapasha, JJ Hill, Cargill, Dwan, Villafana, Dayton, Pillsbury, Cleveland, Wilkins, Kellogg, Stassen, Humphrey, Wellstone. These were not pied pipers leading their people to a gold rush dream but visionaries, inventors, leaders who built bridges of cooperation between extremes and railroads to the nation’s future, grounding it as tillers of land, lumberjacks and millers to grow productive industries. These were champions of democracy who balanced—some better than others—the private and the public interest.

Minnesotans can stand on the shoulders of those giants and see further so as to envision a more perfect economy and society rather than follow blindly those who would re-frame the great errors of our recent past.

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  • Rochelle Ascher says:

    August 30, 2012 at 10:26 am

    Minnesotans CAN do something about this.
    There is a bill in the House of Representatives, HR 1489, introduced by Cong. Marcy Kaptur, to reinstate Glass Steagall.  It has 78 co-sponsors, and is bi-partisan.

    Unfortunately, Minnesota is one of the few states that has no member of its delegation as a co-sponsor.

    Co-sponsors include over 20 members of the Congressional Black Caucus, both chairs of the Progressive Caucus, but also the head of the Balanced Budget Caucus, and while the majority of the co-sponsors are Democrats, there are significant Republican co-sponsors. It has also been endorsed by many labor organizations (AFL-CIO,AFT,IAM, IFPTE),
    by organizations and farm organizations
    (the National NFU and the Nevada Farm Bureau), and hundreds of local unions, city councils, etc.

    Also many bankers have recently called for the reinstatement of Glass Steagall, as has the Small Business Administration representing over 65,000 small businesses, and Tom Hoenig, former chair of the Kansas Cit Fed and now Vice-Chair of the FDIC.  Senate candidates Elizabeth Warren and Tammy Baldwin have made this a central issue in their campaign - in fact Elizabeth Warren has circulated a petition calling on the US Congress to reinstate Glass Steagall, and has garnered over 100,000 signatures.

    I urge the Minnesota congressional members to add their names immediately,

    Rochelle Ascher

    I would URGE the members of the Minnesota delegation to add their names
    immeidately.  Such a bill was introduced in the Senate in 2010 by Senators Cantwell and McCain. Unfortunately, it was killed by none other than Tim Geithner.