Cantwell-McCain to Be the New Glass-Steagall

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Related subjects: Economic Recovery, Legislation, Mortgage & Credit Crisis, Obama administration, U.S. Economy, U.S. Law, U.S. news, U.S. Politics Comments (2)

17 December 2009 :: staff

A bipartisan bill, proposed by Sen. Maria Cantwell (D-WA) and Sen. John McCain (R-AZ), proposes restoring the provision of the Glass-Steagall Act, which prohibited banks from merging certain types of activities which present inherent fiscal conflicts of interest. The Cantwell-McCain bill would force the break up of major Wall Street firms that many believe have grown beyond the size where low-level commercial lending is seen as profitable.

There seems to be growing support for the idea, as legislators who had previously voted to repeal Glass-Steagall are now coming to understand the gravity of the impact of that regulatory shift. Under the new bill, commercial banks would be barred from merging with investment banks, a partitioning of the financial services sector that would restore incentives to each level of wealth and trade volume, thus ensuring smarter long-term investment choices and more efficient distribution of credit.

Reuters reports:

Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman, Morgan Stanley (MS.N: Quote, Profile, Research), Citigroup (C.N: Quote, Profile, Research), JPMorgan Chase (JPM.N: Quote, Profile, Research) and Wells Fargo (WFC.N: Quote, Profile, Research) — to spin off investment and insurance operations, said Demos, a progressive think tank in New York.

House Democratic Leader Steny Hoyer told reporters on Tuesday at his weekly news conference that reinstating Glass-Steagall was “certainly under discussion … As someone who voted to repeal Glass-Steagall, maybe that was a mistake.”

The landscape appears to have resolved into a clear picture, which shows the repeal of Glass-Steagall contributed directly to the reckless atmosphere of unregulated high-level speculation, at values far in excess of the sustainable supply of real investment, and so to the credit freeze of 2008-2009 and the financial collapse. Glass-Steagall was a series of laws that were implemented during the same reform process that brought about the Federal Deposit Insurance Corporation (FDIC), which guarantees the deposits in commercial bank accounts up to a certain level ($100,000 as of last year, bumped to $250,000 this year).

The Depression-era reforms were intended to prevent a repeat of the catastrophic national wave of bank failures that deepened and prolonged the Great Depression (literally thousands failing in just a few years, the wealth of their clients vanishing entirely). And the reforms worked. There were no cases of mass bank failure during the Glass-Steagall era. But the 2008 financial crash was directly linked to the overextension of banks that had not only made bad bets but had come to depend entirely on those bets’ irrational profit expectations working out.

The result was the collapse of credit markets, the paralyzation of commercial lending, the ensuing collapse of the small-business job market, and 158 bank failures over the last two years (133 this year alone). The Cantwell-McCain bill would be a key step forward for sweeping financial regulatory reform, even as broader reforms are being debated in both houses of Congress.

Key to Pres. Obama’s financial regulatory reform proposal would be stricter regulation of institutions engaged in more than one of the business areas separated by Glass-Steagall, and a new Consumer Financial Protection Agency, which major banks are aggressively fighting to stop. There are reports major banks have spent as much as $300 million already this year alone to lobby against the reforms.

Newsweek is reporting:

The Senate prospects for the success of the McCain-Cantwell bill—which the two plan to announce together on Wednesday morning—seem bleak at best. But McCain and Cantwell join a still small but not insignificant insurgency of chronic doubters, including former Federal Reserve chairman Paul Volcker, who say not nearly enough is being done to change Wall Street and, in particular, to address the “too big to fail” problem. The issue is one of the few in Washington that can unite the left and right sides of the political spectrum. Democrats like Cantwell deplore Wall Street’s outsize role in the real economy and its lobbying influence, and conservatives such as McCain are appalled at the way the market system has been undermined—some would say rigged—by the power of the big banks.

The Senate is expensive to get into, the costs of campaigning for a six-year Senate term in the tens of millions, meaning most sitting senators are millionaires themselves, and there is a closer allegiance between the Senate and the banking sector than is the case in the House of Representatives. But the failure of the nation’s major banks to behave responsibly within the parameters of a market system is now seen as evidence that an unreformed banking system cold be a direct threat to the overall economy and to the sustainability of a financial market system in the US.

This is shifting momentum toward something along the lines of the Cantwell-McCain proposal. While the president favors a sweeping overhaul of financial regulations, some legislators say enacting vital reforms in targeted ways may be more effective: first imposing new Glass-Steagall regulations, breaking up the big banking conglomerates, and then instituting some form of the president’s proposed Consumer Financial Protection Agency, that would respond directly to allegations of fraud, predatory lending and other risky behavior.

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