Deja Vu Glass-Steagall?

by Elaine Schwartz    •    Jan 22, 2010    •    684 Views

Thinking back to Glass Steagall (and related 1930s legislation) which was formally repealed in 1999 (summarized in “It’s Complicated”, my 1/17 blog), there were five problem areas that sound remarkably similar to today’s challenges:
1. Abuse of diversified investment services. Banks had conflicts of interest when they implemented commercial and investment activities.
2. Branch banking: There was concern about banks becoming too large.
3. Interest Rates: Competing for savers through higher interest rates, banks engaged in potentially destructive through high interest rates.
4. Deposit Insurance: Money was fleeing the banks because of lack of confidence.
5. The Power of the Federal Reserve: Which banking authority should be strengthen to prevent future banking abuses?

Today, the White House indicated similar banking industry goals. But Glass-Steagall worked for a 1930s banking environment. Today we have an interconnected world. If US banks are constrained, will businesses easily move to those abroad who are not? As happened during the 1970s here, will disintermediation (my 1/17 blog) resurface?

The Economic Life:
The impact of financial legislation can be unpredictable. Hopefully, legislators will consider opportunity cost more so and populist rage less so when deciding what ultimately will benefit the most people.

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