Glass-Steagall Still an Issue

WNYC reporting on Glass-Steagal, Sanders' and O"Malley's support for reinstatement, and Mrs. Clinton's lack go support.

Glass-Steagall Still an Issue

Whether the overturning of the Glass-Steagall Act that separated banking from securities trading led to the Great Recession is disputed by scholars and presidential candidates. Elizabeth Williamson, reporter for The Wall Street Journal covering national politics, talks about how 2016 candidates are still debating the 1930s bill, its 1990s repeal, and candidates reactions to the recent market slide.

The former President and I lived through the Glass-Steagall debate. And his statement is flat wrong. The Graham-Leach-Bliley Act that President Clinton signed had everything to do with the crisis.

The financial crisis occurred because banks involved in trading had become massive, concentrated and interconnected in response to the repeal of Glass-Steagall’s separation. It makes no difference that Bear Stearns and Lehman were not actually universal banks (meaning both commercial and investment). The point was that they were enormous and completely tied into the other big banks.

The big universal banks were directly in the path of the financial crisis and would not have survived without the TARP bailout (provided with no strings attached) and dozens of other supports from the Fed and Treasury.

Of course, as Clinton said, the “unified” banks were slightly less likely to fail because they were connected to the US Treasury indirectly through FDIC insurance. However, the real question was whether failure of any individual banks of certain significance could potentially trigger a systemic failure, dragging down all banks.

That was exactly what happened in 2008. It was a direct result of the massive increase in the size, concentration and interconnectedness of financial institutions as a consequence of the Graham-Leach-Bliley Act. The former President did many fine things, but signing that Act was not one of them.

Two of the most prominent liberals in the Senate have joined forces to take on the big banks as Sen. Bernie Sanders (I-VT) has announced that he is teaming up with Sen. Elizabeth Warren (D-MA) to co-sponsor her bill that would reinstate the Glass-Steagall Act.