Glass-Steagall Act Should Be Restored

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BY JOHN CONYERS JR.

This week marks an important anniversary that will go unnoticed in many corners. Ten years ago, a little known Depression-era law known as the Glass-Steagall Act was repealed. It passed with large margins in both houses of Congress and was signed by President Bill Clinton. On Wall Street, the titans of capitalism cheered while it went unnoticed by most Americans that an important guard against financial instability and conflict of interest had been wiped away.

The Glass-Steagall Act had a simple premise: America’s banking sectors and investment houses need to remain separate to prevent banks from gambling on the stock market with our savings. President Franklin Roosevelt knew that banks, like other institutions, could not be trusted to police themselves. After witnessing the widespread failure of financial institutions in the Great Depression he recognized a firewall was needed between the casino on Wall Street and the private investment engines of Main Street

Unfortunately, we forgot this lesson. Without Glass-Steagall serving as a critical check on the power of banks, the floodgates of speculation were opened. The banks leveraged personal savings accounts to trade in exotic securities and assets. Banks, insurance companies, and investment firms merged at an astounding pace. No longer content to simply finance home mortgages, these new hybrids began creating and selling securities based off of the speculative value of shaky mortgages. The banks took on more risk because risk was profitable. No one paid much attention to what would happen when the speculation bubble burst.

Now we know. Just as in the Great Depression, when bank investments in securities caused the market to fail, present day reckless investing caught up with Wall Street. Because the banks had become “too big to fail,” the American taxpayer was forced to step in and save the titans of capitalism from themselves, subsidizing the losses and privatizing the gains.

This 10-year anniversary of Glass-Steagall’s repeal could not serve as a better reminder.

Currently, the Obama administration is working with both houses of Congress on legislation aimed at preventing a third major calamity in the banking industry. I am concerned, however, that their preferred method seems to focus on empowering our financial regulators to manage and mitigate some level of “acceptable risk” within the present system, instead of correcting the structural flaws that make a collapse likely to recur.

It is critically important that this debate on financial services reform directly assess the fundamental problems that led to last year’s meltdown. We must ask ourselves whether it is enough to address the symptom and not the disease. Should we think bigger? And can we learn from our mistakes and the lessons of the past?

I am a believer in this latter approach. And I am not alone.

President Barack Obama’s chief outside economic advisor and former Federal Reserve Chairman Paul Volcker, Nobel Prize-winning economist Joseph Stiglitz, and Nouriel Roubini, the economist who correctly predicted the financial crash, all agree that some form of the Glass-Steagall firewall must be restored if the architecture of our financial system is to be sound. That is why, in the coming weeks, I will introduce a modernized and updated version of the Glass-Steagall Act.

We must view a once-in-a-generation collapse of the capital markets as a once-in-a-generation opportunity to address the recurring dangers that threaten our system. A return of Glass-Steagall is an important part of this discussion and an example of what the federal government can do when confronting a big problem with a core solution.

I am hopeful that my colleagues in the Congress and my fellow Americans will consider the merits of such an approach in the coming months and will have the strength to consider the benefits of fundamental reform. Our country and our economy cannot afford to revisit this issue 10 years from now.

U.S. Rep. http://conyers.house.gov/“>John Conyers Jr., D-Detroit, represents Michigan’s 14th congressional district.

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