Conservatives and Libertarians should Support the Return of Glass-Steagall
By William K. Black

 

 

Glass-Steagall prevented a classic conflict of interest that we know frequently arises in the real world.  Commercial banks are subsidized through federal deposit insurance.  Most economists support providing deposit insurance to commercial banks for relatively smaller depositors.  I am not aware of any economists who support federal “deposit” insurance for the customers of investment banks or the creditors of non-financial businesses.

It violates core principles of conservatism and libertarianism to extend the federal subsidy provided to commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations.  Absent Glass-Steagall, banks could purchase anything from an aluminum company to a fast food franchise and (indirectly) fund its acquisitions and operations with federally-subsidized deposits.  If you run an independent aluminum company or fast food franchise do you want to have to compete with a federally-subsidized rival?

Deposit insurance is a material federal subsidy, but it pales in comparison to the implicit federal subsidy we provide to systemically dangerous institutions (SDIs) (so-called “too big to fail” banks).  The SDIs are precisely the banks most likely to purchase non-commercial banks.  The general creditors of SDIs are protected against all loss so they funds to SDIs at a substantially lower interest rate than smaller competitors.  The largest SDIs are commercial banks that get both the explicit subsidy of federal deposit insurance and the larger subsidy unique to SDIs.

No conservative or libertarian should want the SDIs to maintain their political and economic dominance.  The SDIs’ dominance comes about not due to their efficiency but their size and the size of their lobbying wallet and force that allows them to extort greater federal subsidies than their rivals.  If conservatives and libertarians have any uncertainty about their position on Glass-Steagall they should consider these facts: (1) President Obama opposes ending the SDIs, (2) has done nothing effective to end the large federal subsidy provided to the SDIs, and (3) opposes bringing back Glass-Steagall and removing the explicit federal subsidy to banks that indirectly provides a competitive advantage to their commercial affiliates.

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Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack

Category: Regulation, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Conservatives and Libertarians should Support the Return of Glass-Steagall”

  1. Derektheunder says:

    Everyone except high-level executives in big banks and their inner circle should support it.

  2. DeDude says:

    The way the corporate conservatives have pulled their Tea Party sock-puppets away from support of this reform, is by going so much further that the coalition with liberal democrats become impossible. They got them to require that the only solution is to completely abandon the FDIC. The corporates know that liberals would not go along with that so they get the desired comfortable stall-mate and can continue their robbery of everybody.

  3. Chuck says:

    Curious, where does this idea that conservatives and libertarians don’t support reinstating Glass-Steagall? Maybe the political and corporate elites don’t support reinstatement as they are largely the beneficiaries of the repeal, but I don’t know ANYBODY who supports the status quo.
    It seems anyone who leans left or right is automatically assigned the extreme position of left or right and no possibility exists that some folks don’t actually fit the media portrayal of a liberal, conservative, or libertarian.

    • DeDude says:

      The support in the House for reinstating Glass-Steagall is remarkably deficient in GOP and tea party candidates.

      http://market-ticker.org/akcs-www?post=187294

      It may have been drowned in tribal warfare (“if Democrats support it, I am against it”). But it does not look like any of those famous tea-party and libertarian candidates are behind a simple reinstatement. If their supporters are, then they should contact their representatives and demand an explanation.

  4. Frilton Miedman says:

    I’ll agree that this is definitely a conservative problem, however, NO ONE in office is going to support any legislation that ensures they lose their next election.

    We absolutely must get money out of politics, until then, we’re only pipe dreaming if we think meaningful regulations will ever be back for the TBTF’s. – they own our government, effectively they own us.

    • DeDude says:

      I am not as pessimistic as you although I agree that it is an uphill battle. What if everybody wrote their congress critter a letter like this:

      Dear [Congress critter]

      Regarding your last fundraising solicitation. Please answer the following questions:

      1). Why were you not a sponsor of H.R. 1489 (112th): Return to Prudent Banking Act of 2011?

      2). Will you co-sponsor and work hard to get this bill back up for a vote?

      Please include in any future fundraising letters an update on your efforts to reinstate Glass-Steagall and separate the Wall Street casino from regular banking. I will use those updates as a guidance for how and whether I will support you in the future.

      Thank you.

      Sincerely

      [Sheeple Voter]

      • Frilton Miedman says:

        That’s all well and good, but does nothing about the anonymity of SuperPac’s.

        If, say, Goldman Sachs keeps a list of reps who vote the way their lobbyist tells them, they run huge money ads, anonymously, to keep those puppets in office.

        What we need is an amendment, and it has to be done through the states because Congress continues to ignore the public’s anger over it for the obvious reasons.

        I’m a HUGE fan of Bernie Sanders, and to a lesser degree, John McCain, who’ve both displayed the balls to confront special interests past or present, Bernie Sanders currently has a petition on his website to get money out.

        I’ve signed it – http://www.sanders.senate.gov/petition/?uid=f1c2660f-54b9-4193-86a4-ec2c39342c6c

      • bear_in_mind says:

        I believe both of you gentleman are on-point. Money in politics (i.e. “money is speech”) has completely nuked the premise of representative government as envisioned in the “one citizen, one vote” precept.

        DeDude’s prescription is a partial, but necessary, step in increasing civic engagement and attempting to hold our representatives accountable. In fact, it may be the only step average citizens have at their disposal, but we the people MUST overcome the toxic blend of apathy and cynicism that far-right wackos have promulgated.

  5. CitizenWhy says:

    Huh? Libertarians believe government should not even exist, never mind private ownership in any way.

    • Frilton Miedman says:

      You’re confusing Libertarians with Austrians.

      Libertarians believe in less government, specifically at the personal level, Friedman himself was concerned with concentrations of power that would trample Democracy and free markets – both government and private, Austrians are ONLY concerned with government.