from an expert in the field:
from an expert in the field:
Sheila Bair was chair of the Federal Deposit Insurance Corporation from
2006 to 2011 and is author of Bull by the Horns: Fighting to Save Main
Street from Wall Street and Wall Street from Itself (Simon & Schuster, 2013;
not available at Costco).
Mark J. Roe is a professor at Harvard Law School, where he focuses on
business and financial law. He is the author of Strong Managers, Weak
Owners; Political Determinants of Corporate Governance (Oxford University
Press, 2006; not available at Costco).
Opinions expressed are those of
the individuals or organizations
represented and are presented
to foster discussion. Costco and
The Costco Connection take no
position on any Debate topic.
Is America giving
up too much privacy
Are standardized tests
a fair measure of
YES: 10% NO: 90%
votes received by
August 31, 2013.
IN THE YEARS leading up
to the Great Depression,
some big banks used deposits
for rampant speculation,
contributing to the stock
market crash of 1929 and the ensuing Great
Depression. In 1933, Congress enacted Glass-Steagall, which confined deposit-taking banks to
commercial banking activities such as making loans
and processing payments. But Glass-Steagall was
repealed in 1999 and now the big banks get into all
sorts of investment-bank activities using depositors’
money, including derivatives—volatile instruments
that derive their value from other things, such as
interest rates, currencies, bond prices, even whether
people pay their mortgages.
The question is, do we want the government
subsidizing them? Deposit-taking banks receive
valuable government benefits such as the ability to
borrow from the Federal Reserve. Their depositors
are protected by the Federal Deposit Insurance
Corporation, making it easy for them to attract
deposits cheaply. This government support gives
Main Street households peace of mind that their
money is safe and prevents destabilizing bank runs
in times of crisis. And letting banks use customer
deposits to make prudent loans makes sense,
because there are clear economic benefits. The cus-
tomer accesses credit to start a business, buy a
home, etc. The bank makes a profit from interest
on the loan. It is a win for both sides.
Securities and derivatives activities, on the
other hand, are frequently zero sum: One side wins
only if the other side loses. Market losses can be
sudden and substantial. And sometimes the bank is
just trying to make a speculative profit or, worse,
taking advantage of less sophisticated customers,
particularly with complex derivatives.
Some argue that bad lending brought us the
2008 financial crisis. But the system could have
absorbed the mortgage losses. The problem was the
trillions in esoteric securities and derivatives held
by large financial institutions, which accelerated
and magnified those losses. The sudden market
losses on those instruments were responsible for
the crisis, not the underlying loans.
If a bank wants to lend out my deposits to help
a family buy a car or send a kid to college, I’m OK
with that. But if they want to make huge derivatives
bets in London or help some hedge fund speculate
on whether I will default on my mortgage, I say
make them find the money elsewhere. C
MANY BLAME THE financial crisis on the 1999 repeal
of the long-controversial
Glass-Steagall Banking Act
of 1933, which had separated deposit-taking commercial banks from
securities-trading investment banks. Repeal,
which allowed the banks do both under one
roof, did not cause the financial crisis. Focusing
on repeal as a reason for the financial crisis
diverts policymakers from the real fixes that the
financial system needs.
Look at which major financial institutions
failed during the crisis: Lehman Brothers, AIG
and the Reserve Primary Fund. None of these
were deposit-taking commercial banks that Glass-Steagall’s repeal set loose. AIG was a mega-insurer,
not a commercial bank. Lehman was an investment bank. The Reserve Primary Fund, brought
down by its purchases of IOUs from Lehman, was
a money-market mutual fund.
True, major banks tottered. But they were at
risk not because they had brought commercial
and investment banking under one roof, but
because they (mis)handled mortgage securities
and investments. Mortgage lending, however, is
a long-standing activity for commercial and sav-
ings banks, mostly unaffected by Glass-Steagall
or its repeal.
The best case against Glass-Steagall’s repeal is
not that mixing investment and commercial
banking caused the crisis. Rather, the best case
arises from a general sense that American financial institutions have become too complicated to
regulate and too big to fail even when they stay
within their traditional businesses.
But overturning Glass-Steagall’s repeal is
unhelpful for usefully simplifying and strengthening America’s banks, whose fault lines lie elsewhere, not in the line between investment and
commercial banking. Thinking about whether to
overturn it, and how, diverts policymakers’
attention from the main issues for the future.
The financial crisis revealed structural problems
in banking, but they come from insufficient capital to cushion a bank’s fall, and from too many
financial institutions having simultaneously
become too big, too interconnected and too
complicated to fail.
Glass-Steagall is a distraction. The goal is to
shore up the weaknesses revealed by the global
financial crisis; policymakers in the U.S. and
other countries should look elsewhere, not at
votes received by
September 11, 2013. Results
may reflect Debate being
picked up by blogs.