Sunday, November 15, 2015

The Steagles

[ed. G-20 countries appear ready to do something or other (but possibly not much!) - eleven years after the fact. See also: End of ‘Too-Big-to-Fail’ Banking Era Endorsed by World Leaders]

Fun fact: During the 1943 professional football season, the World War II draft had so depleted the ranks of football players that the Pittsburgh Steelers and the Philadelphia Eagles were forced to unite their teams into a joint production that became colloquially known as “the Steagles.” In a heartwarming turn, this plucky band of men went on to one of the winningest seasons in the history of Pennsylvania football. That was, alas, their only season; the next year each city fielded its own team, and the proud name of the Steagles retreated into history.

I’m beginning to think that we should revive it, however, not for football players, but for those intrepid souls who continue to fiercely agitate for the return of the Glass-Steagall financial regulations. Like the Steagles, these people are not daunted by the many obstacles in their path. Like the Steagles, they are passionate in their determination. Probably also like the Steagles, they mostly don’t know much about Glass-Steagall.

And we desperately need a name for Team Steagles, because they seem to have become a powerful force in the Democratic Party. Last night’s Democratic debate, like the first one, featured lengthy paeans to the joys, and urgency, of a modern Glass-Steagall act. Somehow, an obscure Depression-era banking regulation has turned into a banal political talking point. Or worse -- a distraction.

You, like the Steagles, may not know much about Glass-Steagall. That’s all right. There is no particular reason that most of us should know about Glass-Steagall, and many people manage to live perfectly happy and fulfilling lives anyway.

Here's a quick introduction: The first thing you should know is that there are actually two Glass-Steagalls. For some reason, Washington likes to refer to many laws by the names of their congressional sponsors, rather than the actual title of the law, which is why many people know our most recent major campaign finance law as McCain-Feingold rather than the Bipartisan Campaign Reform Act of 2002.

Senator Carter Glass of Virginia and Representative Henry B. Steagall of Alabama, both Democrats, co-sponsored two major financial bills. The first concerned the operation of the Federal Reserve system, which is complicated. When most people speak about “bringing back Glass-Steagall” they are referring to the second law, otherwise known as the Banking Act of 1933.

This act had a number of provisions, the most important of which are:
  1. The creation of the federal deposit insurance program
  2. The forcible separation of commercial banking and investment banking activities (except that commercial banks could still buy lots of government bonds, because hey, look who’s writing the law)
  3. Outlawing interest rates on checking accounts, and capping the interest rates that could be paid on other sorts of accounts, colloquially known as “Regulation Q”
  4. The creation of the Federal Open Market Committee
  5. Tighter control by the Federal Reserve over the activities of banks, and reporting requirements for said banks to facilitate same
There were also some fiddling rules about things like bank officers borrowing from their own banks.

Glass-Steagall II was never “repealed.” The FDIC is still very much around, as is the FOMC. The Federal Reserve still has quite a lot of power to regulate banks. If you get control of a bank and use it to write yourself unlimited loans, you can still expect to spend quite a bit of time in the pokey when you get caught.

However, Glass-Steagall II has been extensively modified by subsequent regulation. For example, amendments through the 1940s modified the FOMC to make it more like the modern version. The rules about interest rates were eventually scrapped, which is why you now get 0.0025 percent interest on your checking, instead of a free toaster for opening an account, the way Grandma did back in the good old days. And the provisions limiting the entrance of commercial banks into investment activities (and vice versa) were gradually relaxed, and then abolished with Gramm-Leach-Bliley (the Financial Services Modernization Act of 1999).

Calls to “bring back Glass-Steagall” are, in fact, almost always calls to bring back this one provision. The average person agitating to bring back Glass-Steagall (a group which includes Martin O'Malley and Bernie Sanders), probably doesn’t know quite what the FOMC does. They are not overly concerned about the danger of interest-bearing checking accounts. But boy, do they want the commercial and investment banks split apart.

by Megan McArdle, Bloomberg | Read more:
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