Why are we looking at Glass-Steagall?

Marketplace Staff Dec 31, 2009

Why are we looking at Glass-Steagall?

Marketplace Staff Dec 31, 2009


Bill Radke: As the experts try to figure out why our financial system broke last year, many fingers are pointing to the 1999 repeal of the Glass-Steagall Act. So what was Glass-Steagall, why did we junk it and can we ever go back? Marketplace’s economics correspondent, Chris Farrell, is here. Good morning.

Chris Farrell: Good morning.

Radke: Glass-Steagall. Just, it takes you back to a simpler time.

Farrell: Oh yes, it really does. It was the Depression-era law that separated commercial banking from investment banking from insurance companies. The image of the time was of a ship. So with a ship, you have the hold, and it has divisions, so if you get a leak in one part of the hold, you can shut off the rest of the ship, you can isolate it. And that was the image that regulators had at the time. We’re going to have these different compartments, and if there’s trouble with insurance companies, we’ll deal with that. If there’s trouble with investment banks, we’ll deal with that. It was a much simpler time.

Radke: So if the ship was floating and the compartments were compartmentalized and all was well, why did we mess with that?

Farrell: What happened with Glass-Steagall is that it was eroded over time because, well now we live in this global economy and there’s all kinds of competition. Everything got mixed together; financial institutions would go to Washington and say, “You know, these regulations are preventing us from making profits. We’re losing out to the Europeans, we’re losing out to the Japanese.” So over time, the divisions broke down.

Radke: So it sounds like you’re kind of defending that action, that it wasn’t just either idiotic or venal.

Farrell: The 1999 act that repealed Glass-Steagall was not idiotic — although there was an awful lot of lobbying money that was spent, I do have to say that. But it was acknoledging the world. Here’s how I look at things today: Is there really a difference between AIG, the insurance company, Goldman Sachs, the investment bank, and Bank of America, the giant bank? I don’t think so. That’s the world we have to regulate. I love Glass-Steagall, because it did work for awhile, and you know what it does? It protects grandma’s money, and that’s a good thing. But I don’t think it’s the right regulation for a global economy.

Radke: So then how do we protect grandma’s money today?

Farrell: Ah, and this is where there’s a lot of creative ideas out there. And the ones that I like essentially say there is no difference between an AIG, a Goldman Sachs, a Bank of America. They all need to be regulated the same. We need to create essentially a system where if they get into trouble, they automatically go into bankruptcy, management is wiped out, existing shareholders are wiped out and we isolate the problem that way. But we need to regulate them all the same. Because the fact of the matter is, Bill, they’re all in the same businesses these days.

Radke: Marketplace’s economics correspondent, Chris Farrell, with that. Thanks a lot, Chris.

Farrell: Thanks a lot.

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