Wall Street Regulation

Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren… The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Part 4 of the Special “Off The Reservation” Election Series in the Long Island Press.

The Banking Act of 1933, commonly known as Glass-Steagall, was established to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior many observers at the time credited for the market crash that precipitated the Great Depression. For some, the repeal of Glass-Steagall, by the Gramm-Leach-Bliley Act of 1999, was the deathblow to financial prudence on Wall Street.

 In reality it was simply the formal recognition of careless financial practices that were largely in place already. Since the near-collapse of the banking industry in 2008, Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren, the former federal consumer protection advocate now running for Senate in Massachusetts. The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Wall Street reform is as important as it was in 2008 but both President Obama and Gov. Mitt Romney have taken great pains to avoid talking about it too much. For his part, President Obama seems content to rest on the laurels of the Dodd-Frank Act, Congress’s attempt to rein in Wall Street excess, which had enough support to pass but not enough to be properly funded or enforced. According to Romney’s platform, he would “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” That’s the extent of his vision for the future of Wall Street according his platform. Ten words.

So while the rest of the country is suddenly talking about a law enacted almost 80 years ago, these guys aren’t going anywhere near it. The truth is, Wall Street reform and, more specifically Glass-Steagall, is more complicated, making it easy for Obama and Romney to be evasive.

So let’s answer two questions. What would actual Wall Street reform look like and what exactly was Glass-Steagall?

The purpose of the original act was to establish a barrier between traditional banks and the risk-taking investment firms, denying investment banks access to consumer deposits and secure, interest-bearing loans. The unwritten effect of Glass-Steagall, however, was to establish a culture of prudency in the consumer and business banking realm, leaving sophisticated professional investments to more savvy financiers who had the ability to calculate the inherent risk of a financial instrument. For decades to follow, the merits of Glass-Steagall would continue to be debated, but it nevertheless drew a marked distinction between the function of a consumer bank and an investment bank.

Today reinstating Glass-Steagall is a common rallying cry among those who decry the bad behavior of Wall Street. Its repeal has become the fulcrum of nearly every debate surrounding deregulation. Actually accomplishing this, of course, is easier said than done.

The best way to reconcile the debate over whether to reinstate Glass-Steagall is to appreciate that the culture of Glass-Steagall was more important than the act itself. Over time the restrictions placed on bankers under the act were chipped away, but the culture that governed the banking industry endured beyond its measures. Eventually, savvy bankers and politicians found ways to loosen its screws and interpret the act to their own benefit.

Don’t Just Blame Republicans

In 1978, President Jimmy Carter oversaw the passage of the International Banking Act, a bill that should probably receive as much, if not more attention than Gramm-Leach-Bliley. Essentially, the act allowed foreign banks or entities that engaged in “banking-like activities” to participate in domestic financial markets. For the first time, foreign investment firms were able to make competitive loans so long as they didn’t compete for consumer deposits; initially individual states could determine whether their regulatory structure could support this new activity. The government would go on to loosen restrictions governing the competition for consumer deposits and allowing bank holding companies to treat money markets like checking accounts.

In his book “End This Depression Now,” economist Paul Krugman argues that perhaps the most influential step with respect to the banking sector came with Carter’s passage of the “Monetary Control Act of 1980, which ended regulations that had prevented banks from paying interest on many kinds of deposits. Unfortunately, banking is not like trucking, and the effect of deregulation was not so much to encourage efficiency as to encourage risk taking.”

 By 1987 the bank holding companies, including foreign companies allowed to operate within the U.S. banking system, were granted access to mortgages to create a package of investments called mortgage-backed securities; the threshold for the amount of investing activity in instruments such as these was also increased, paving the way for the growth of investments backed by the strength (or weakness) of the consumer market.

During that same year, members of the Federal Reserve began calling for the repeal of Glass-Steagall as then-chairman Paul Volcker was providing the tie-breaking resistance. But this was a mere formality because by this time, Glass-Steagall was effectively over.

Yet even though most of the threads of regulation had been pulled from the overcoat that protected consumers from risky banking practices, the culture of prudent banking still existed to an extent; maintaining the Glass-Steagall Act on the books was an indication of this sentiment. Throughout the decades when regulations were steadily eroding, powerful national figures such as Paul Volcker under Carter and Reagan, and Treasury Secretary Nicholas Brady under George H.W. Bush managed to temper the enthusiasm of the movement.

That George Bush Senior heeded their admonitions was an admission that the public’s appetite for deregulation was actually beginning to wane in the post-Reagan hangover. Richard Berke’s New York Times article of Dec. 11, 1988, on the eve of the Bush presidency, encapsulated this feeling. Berke wrote, “Lawmakers and analysts say the pressure is fed by a heightened public uneasiness about deregulatory shortcomings that touch the daily lives of millions of Americans: from delays at airports and strains on the air traffic control system to the presence of hazardous chemicals in the workplace to worries about the safety of money deposited in savings institutions.” Alas, these four years would prove to be a momentary hiccup in the deregulation movement.

During the Clinton years, the nation’s leadership was largely comprised of proponents of deregulation. In fact, by his second term, Clinton was almost entirely surrounded by rabid free market enthusiasts. A former chairman at Goldman Sachs, Robert Rubin, was Secretary of the Treasury, Alan Greenspan was still at the helm of the Federal Reserve and Phil Gramm was the head of the powerful Senate Banking Committee. All of these men had close ties to Wall Street and made no secret of their intention to release bankers from the burdensome shackles of regulation and oversight.

Reforming Reform

In 2008, economist Joseph Stiglitz warned of the enduring negative consequences of deregulation. At a hearing held in front of the House Committee on Financial Services, Stiglitz invoked Adam Smith saying, “Even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions was to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standards of our highly regulated financial entities.”

For emphasis he noted, “We have shown that we can do this when we want, when terrorism is the issue.”

Still, the nagging question remains as to what reform might look like. After all, not all deregulation is irresponsible. Most of the discussion in the media surrounding deregulation revolves around the concept that our banking institutions are “too big to fail.” Thus the rallying cry for reinstating Glass-Steagall and separating banks from investment banks. I’m in tepid agreement with the underlying principle, but the reality of the situation is far more complicated. The fact is banking has gone global and the deregulation genie is out of the bottle.

As I said earlier, Glass-Steagall was as much about instilling a culture of prudency to the banking world as it was about erecting a barrier between commercial banks and investment banks. Advocates like Elizabeth Warren like to say that prior to 1999 and the repeal of Glass-Steagall, the economy functioned through periods of both prosperity and recession since 1934 without the banking sector once collapsing. It’s a fair, but oversimplified assertion that overlooks the fact that Glass-Steagall was on a ventilator in 1978 and dead by 1980. A 30-year run of prosperity from 1978 to 2008, with a few brief recessions in between, is nothing to sneeze at.

Restoring balance to the banking sector does not necessarily require separating the banks. Not yet at least. It begins with transparency and reestablishing the culture of prudency that has been conspicuously absent over the past decade. After all, you cannot value what you cannot see; nor can you mitigate risk unless you first manage reward.

What this really boils down to is accountability, which is ultimately a behavioral issue. Allowing investors to actually see how a bank behaves by viewing the size and scope of their transactions would theoretically assuage their appetite for risk. Given these conclusions, it’s easier to make the case that our current president would provide more accountability and inspire behavioral changes on Wall Street, particularly given Romney’s intransigence when it comes to considering financial reform. But tough talk against Wall Street has all but disappeared from Obama’s rhetoric leaving little hope that a second term will elicit any further positive change. So this week, while neither man seems serious about financial reform, the status quo is better than further deregulation and letting bankers rule the roost.

Tie goes to the incumbent.

#OWS WK4: Kaptur and Gramm and Schumer, Oh My.

Tying the tubes of banks that have been, ahem, fornicating with the global economy and impregnating speculative bubbles only to watch them burst, will only hasten the inevitable seismic crash that looms around the corner. Breaking up the banks will happen one way or another…either by the law of the land or the law of nature.

The only phrase in connection with Occupy Wall Street repeated more often than “We are the 99%” is “What do they want?” The former is, of course, the rallying cry inviting citizens to join the movement against plutocracy in America—a show of strength against corporate greed and government corruption. The latter is the response to the growing number of dissenters in the “American Autumn”—criticism for their lacking a coherent list of specific demands. Personally, the only thing I find lacking is the imagination embodied by this mindless question.

The communal process of exploration and debate taking place in Zuccotti Park is like nothing I’ve ever seen. There are plenty of cogent, specific demands to be heard, but only by those who are willing to listen. A good deal of patience and a pinch of intellect are helpful because this isn’t a bumper-sticker movement and the occupiers don’t suffer fools (Geraldo) gladly.

There is no substitute for visiting the park and absorbing democracy, grassroots style. This past weekend my wife and I brought our two children with us to witness history unfolding in Manhattan, as it will someday grace the pages of a textbook, or a tablet, during their college years. With that said, allow me to indulge the frothing masses with a chunk of raw meat by examining one of the cornerstone issues behind OWS: Glass-Steagall.

Breaking the Bank: A Brief History of Glass-Steagall

In short, this was the name of the Act that prohibited commercial banks from engaging in investment-banking activities, among other things. It was established in 1933 to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior largely credited for the market crash that precipitated the Great Depression. Fast forward to the waning days of the Clinton administration when the Gramm-Leach-Bliley Act repealed the meat of Glass-Steagall and cleared the way for the greatest, most rapid consolidation of banking interests and wealth in recorded history.

Reinstating Glass-Steagall is, of course, easier said than done. Technically, the mechanics of doing it are fairly simple from a structural perspective, though it would cause massive upheaval in the banking world for several years to come. What is almost beyond comprehension are the circumstances that allow banks to continue gambling promiscuously in the world markets, which is a direct result of complementary deregulatory measures, globalization and an extraordinarily loose monetary policy.

These three factors have allowed banks to engage in worldwide investment schemes using cheap, borrowed money in a manner that is both irresponsible and opaque. In other words, be careful what you wish for. Tying the tubes of banks that have been, ahem, fornicating with the global economy and impregnating speculative bubbles only to watch them burst, will only hasten the inevitable seismic crash that looms around the corner. Breaking up the banks will happen one way or another…either by the law of the land or the law of nature.

Protestors from Zuccotti Park to San Francisco are keenly aware of this reality. They have an extremely sophisticated view of the world that goes beyond what we have seen in other movements both here and abroad. It’s their appreciation for complexity and nuance that makes it impossible to translate demands into bite-sized morsels for the media to gobble up and regurgitate into the mouths of shrieking birds in the nest that many television viewers have become.

To make matters worse, our elected federal representatives have no idea how to respond appropriately to a leaderless, populist movement. Apart from some platitudinous, mealy-mouthed responses from ranking Democrats like House Minority Leader Nancy Pelosi or truculent, dismissive statements from the likes of Rep. Peter King (R-Seaford), the upper echelon of American politics is collectively clicking its heels and hoping to wake up on the farm after the storm.

But there is hope for us yet–from someplace you might not expect.

A Buckeye Bulls Eye

Ohio’s 9th Congressional District cradles the southernmost tier of Lake Erie and has been steadfastly represented by Rep. Marcy Kaptur (D) for the three decades. Despite the presence of rollicking Toledo in the westernmost part of her district, things have been pretty quiet in the ninth. Until now.

Ohio’s much ballyhooed loss of two Congressional seats due to redistricting has resulted in a mash up of Kaptur’s 9th district and the neighboring 10th represented by fellow Democratic Congressman, Dennis Kucinich. Kucinich, who has long-represented the most progressive wing of the Democratic caucus, ran back-to-back failed campaigns for the presidential nomination, but he gained more notoriety when he famously called for the impeachment of co-Presidents George W. Bush and Dick Cheney for manufacturing evidence that pushed us into war with Iraq at a cost of nearly $2 trillion, thousands of U.S. soldiers and hundreds of thousands of  civilians. Somehow, this effort lacked the same traction and enthusiasm as the impeachment trial of President Bill Clinton for, well, you know.

The combination of the 9th and 10th districts has given new life to Kucinich, who might otherwise have been homeless after Ohio’s redistricting plan, as he is planning to primary Kaptur for the seat. Not to be outdone, the GOP has recruited newcomer Samuel Wurzelbacher to run on the Republican ticket. This development would be of little moment, however, if Wurzelbacher wasn’t none other than “Joe The Plumber,” who made headlines during the McCain-Obama race. Although it was later revealed that he was neither “Joe” nor a licensed plumber, Wurzelbacher became an oft-abused example of the disenfranchised workingman in America. Not content to be a footnote in American political history, Wurzelbacher now seeks to extend his 15 minutes of fame by attempting to join the ranks of hundreds of other talentless slobs who also have no business running the country.

This entire hubbub overshadows one of the most interesting things to come out of this part of Ohio. Earlier this year Kaptur revived a failed effort during the previous Congress to reinstate regulations repealed under the Gramm-Leach-Bliley Act of 1999. Kaptur’s bill, H.R. 1489, is appropriately titled “Return to Prudent Banking Act of 2011,” and it has the support of 45 sponsors, one of whom is Dennis Kucinich.

The men behind the original bill in question—Gramm, Leach and Bliley—are an interesting lot; notable because not one of them remains in government today though their impact is felt every day. Phil Gramm, one of the most loathsome scoundrels ever to hold office, is the reprobate who brought us the Enron Loophole, disastrous tax cuts that destabilized the first part of the Reagan era, and this horrendous bill that bears his name. His darling wife, Wendy, was at the helm of the Commodities Futures Trading Commission when her husband was shepherding through the bill that would castrate the agency and lead to the collapse of Enron and the birth of energy speculation. She went on to head the conservative think-tank, Mercatus Center, which is funded by the Koch brothers.

Thomas J. Bliley, former representative from Virginia, was himself a serial deregulator. Before handing America this pile of legislative crap, he authored the Telecommunications Act of 1996, which paved the way for massive consolidation in the media industry and gave us Orwellian juggernauts like News Corp. that control the airwaves today.  Jim Leach, also no longer in office, is more of a curiosity. Brilliant, progressive and, at times, defiant, Leach of Iowa often stood in opposition to the increasingly conservative members of his party and was eventually ousted by a Democrat write-in candidate. Although Leach was a noted fiscal conservative, his true expertise was in foreign affairs. By attaching his name to one of the most destructive economic bills ever written, an otherwise brilliant career has been sullied in a way only Bill Buckner could understand.

Going Forward

So, Marcy Kaptur “gets it.” The protestors on Wall Street also “get it.” And believe it or not, many of us in the media also “get it.” If the banking system is going to collapse under its own weight and hubris because of the sheer volume of horrible investments still filtering through the economy with zero oversight, what’s the next logical play?

Apart from the obvious, which is to enact H.R. 1489, I think it’s time to grant subpoena authority to the protestors on Wall Street so they can hold those responsible for the economic crisis accountable at a people’s tribunal. Since our judicial system has failed to do that, perhaps it should be left to the people in Zuccotti Park. And just to bring things full circle to New York politics, the first star witness to be called should be Sen. Charles Schumer, poster boy for Wall Street and the senior Democratic elected representative of our state.

Time’s up, Chuck. Your silence on the Occupy Wall Street movement is deafening and incriminating.