Avoid bailouts: Restore Glass-Steagall

Robert Reich

TEXT OF COMMENTARY

Kai Ryssdal: We spent some time up at the top of the broadcast today talking about the financial crisis next time. What Washington is doing to try to stop something like the last 18 months from ever happening again. Commentator Robert Reich suggests the best new rule for Wall Street is actually an old one.


ROBERT REICH: The five biggest Wall Street banks are even bigger now than they were before the Great Meltdown. Together they hold over 40 percent of U.S. deposits. And they're raking in huge profits and paying fat salaries and bonuses as if nothing happened.

The only difference is, now they know they're too big to fail so the government will bail them out if they get into trouble. And like a giant, gawking adolescent who's just discovered he can crash the convertible his rich dad gave him and the next morning have a new one waiting in his driveway, the big banks will drive even faster and take on even bigger risks.

Almost no one in Washington wants another bailout, but there are two very different ideas for how to avoid it. The administration would put any giant bank that's in danger of failing into a so-called "resolution" process akin to bankruptcy where the bank's assets would be sold off to pay its creditors.

But that's no answer. By the time a really big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other big banks, competing like mad for the same talent and profits, will already have adopted many of the same risky techniques. And the pending failure will already have rocked the entire financial sector.

A better idea is to restore the Glass-Steagall Act, which until 1999 separated investment from commercial banking. No public interest has been served by allowing the casino called investment banking to merge with the traditional intermediary function linking savers to borrowers. In fact, it's caused nothing but trouble.

Separate them, and investment banks would not be too big to fail because they couldn't use commercial deposits, insured by the FDIC, to place big investment bets. Separate them and mortgage lenders couldn't re-sell mortgage debt as securities -- they'd have to bear responsibility for defaults, which would give them an incentive to carefully investigate credit risks before making a loan. Re-enact Glass-Steagall. Not exactly a rallying cry, but it should be.

RYSSDAL: Robert Reich is a professor of public policy at the University of California.

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