States Pass Pro-Glass-Steagall Resolutions

From Think Progress:

These resolutions are non-binding and symbolic. Only the federal government has the ability to reinstate the wall between commercial and investment banking. The idea behind the resolutions, however, is to help Sen. Elizabeth Warren (D-MA) put pressure on the rest of Washington by demonstrating state-level anger over the lack of accountability for the financial collapse. Warren, along with a bipartisan group of Senate allies, is currently pushing a “21st century Glass-Steagall” bill aimed at limiting the ability of commercial banks to engage in risky speculation.

So far, Glass-Steagall resolutions have only passed in Maine and South Dakota, the pairing of one very progressive and one very conservative state reflecting the odd political alliance Cirilli finds to be responsible for the rise of Glass-Steagall resolutions. Relatively progressive Democrats furious about inequality and predatory banking have joined up with libertarians angry about government bailouts to push for a new commercial/investment division.

Whether reimposing Glass-Steagall restrictions could head off another financial crisis is a complicated question. Arguably, the repeal of Glass-Steagall opened the door to a much broader range of financial speculation with a greater amount of assets, creating the sort of concentrated and interlinked risk that led to the domino collapse of banking institutions in 2008. Skeptics, however, note that the most significant 2008 collapses were either not commercial banks or commercial banks that collapsed for reasons other than their own investment banking department’s bets.

It’s also possible Glass-Steagall’s effects were less direct. Economist Joseph Stiglitz believes that the 1999 repeal changed the corporate culture of commercial banks, causing them to think and operate more like investment banks. This new culture led to riskier loan practices of the sort that really did bring down the big banks.

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From the New York Times:

Senator Elizabeth Warren on Thursday introduced an aggressive piece of legislation that intends to take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities. 

The bill, which is also sponsored by Senator John McCain, Republican of Arizona, and two other senators, is named the 21st Century Glass-Steagall Act. Its intention is to create a modern version of the seminal Glass-Steagall legislation from the 1930s, which placed firm limits on what regulated banks could do. It was fully repealed in 1999, laying the groundwork for the mergers that created some of the biggest banks of today. If passed, it could force many of those banks to let go of their trading operations. 

Senator Warren’s bill is one of several that have aimed to add far more bite to the overhauls that have been put in place since the financial crisis. The bill serves as a jarring reminder to Wall Street of why it feared her election to the Senate last year.

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Senator Warren seemed to acknowledge the battle ahead, but she said that having Senator McCain as an ally was an advantage. “He’s a fighter, and it’s going to take a fighter to get this Glass-Steagall bill through,” she said in a news conference. 

Nostalgia for the original Glass-Steagall Act might help the new bill gain interest. Its supporters say the former law had several straightforward benefits, in contrast to the complex regulations that have been put in place since the crisis, like the Dodd-Frank Act of 2010. Glass-Steagall, which had 37 pages, was simple and so easy to put into practice, they say. 

The act also kept banks that use federal deposit insurance out of potentially volatile Wall Street activities, like trading. As a result, problems at investment banks were less likely to infect regulated banks. Losses at the Wall Street operations of Citigroup and Bank of America weighed heavily on those banks during the 2008 crisis.