Wednesday, July 20, 2016

Glass-Steagall is the Wrong Fix

True enough, banks were crushed in 2008.  The government stepped in and bailed them out.  There is no way that this is intelligent economic policy.  Agreed.

But, Glass-Steagall never made any sense in the first place.  Enacted in 1933, Glass-Steagall separated commercial banking from investment banking.  This was driven from the concern that the government was planning to insure commercial bank checking accounts.  If taxpayers stand behind checking accounts, then banks should not be permitted to speculate.  Investment banking was viewed by legislators as a form of speculation.

In 1999, Glass-Steagall was repealed.  Now, the Republican platform has called for re-instating Glass Steagall.  Big, big mistake.

The right answer is not to guarantee checking accounts or any other liabilities of the commercial banking system.  Take the government guarantees away. Then permit banks to do what they want to do, be it investment banking, commercial banking, whatever.  The problem is the FDIC guarantee, not the repeal of Glass-Steagall. The FDIC should be eliminated, along with government guaranteed checking accounts.

It certainly doesn't protect small investors, who are not likely to hold millions of dollars in the their checking accounts. A small investor can simply access money market funds that contain predominantly treasury securities and that would provide all the guarantee that would be needed.  Low income folks don't have large checking account balances.  The guarantee mainly guarantees the accounts of rich folks and large corporations, not poor folks.

Let markets decide who wins and loses, not government.

Going back to Glass-Steagall is bad policy.  Eliminate the FDIC. That's the right direction, if economic growth, fairness, and taking the taxpayer out of this fool's game is the plan.

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