The proposed revival of selected sections of the 1933 Glass-Steagall Act is an idea which is back in vogue. U.S. Sens. Elizabeth Warren, John McCain (R-AZ) and two of their colleagues filed a bill on July 11 titled “21st Century Glass Steagall Act of 2013.” Like its Depression-era predecessor, it would separate traditional commercial banks whose funds are insured by the FDIC from financial institutions that engage in investment, insurance, hedge funds, private equity, and swaps dealing.
The across-the-aisle teaming of two of its co-sponsors – Warren and McCain – tends to distract from the basic question that should be asked: Will the law do what it was intended to, or will the market forces of the 21st century, many of them global, cast it in a different light?
Warren concedes that if Glass-Steagall had been in place in 2008, it would not have prevented the global financial crisis that sprang from weaknesses in the credit rating of mortgage-backed securities, in an environment in which the federal government was pushing homeownership by granting easy credit that borrowers’ incomes ultimately could not support.
Warren maintains that the intent of the law is to give the average depositor, and the nation’s taxpayers, a safe haven from the investment risk that larger financial institutions regularly undertake. Risky investment is fine, she says, but not with our FDIC-insured deposits. She also cautions that too many assets are in too few hands and calls for the breakup of the largest banks. To the industry, those are fighting words.
On CNBC on July 12, media pundits tried to square off Jamie Dimon, the chair and CEO of JP Morgan Chase, against Warren in a “let’s you and him fight” mode. Dimon replied that his bank was “a port in the storm” during the crisis and will be again. He also averred, quite neutrally, that regulation will ultimately be good for the industry.
Despite losing billions in bad trades in 2012, JP Morgan Chase has bounced back. But Mr. and Mrs. John Q. Public can’t gamble like Dimon. The middle class’ ability to recoup a lifetime of savings lost in a bad bet is slim to none, and they’ll need protection. There’s only one problem with this: They may not want it.
To build a healthy financial portfolio requires an income sufficient to save and plan for the future. A stagnant economy in which job prospects are dim, doesn’t offer that. In today’s global economy, we’re vying with emerging middle classes in other countries that, to borrow a phrase, want to have what we’re having.
Also, with longer life spans than in 1933, more financial support is needed for those extra years. So don’t be surprised if the average investor continues to seek risk in pursuit of higher returns despite a re-institution of Glass-Steagall. Yes, it’s a good idea, but it’s a good idea in a drastically changed economy.
