- The Big Picture - http://www.ritholtz.com/blog -

The Return of Glass Steagall ?

Posted By Barry Ritholtz On July 12, 2013 @ 7:00 am In Bailouts,Media,Regulation | Comments Disabled

Senators Elizabeth Warren and John McCain are introducing new legislation [1] to “take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities.”

I have a quote in the column:

“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.

For about 70 years, Glass-Steagall managed to keep the riskier, more damaging part of Wall Street away from what should be the boring, straightforward side of finance,” Barry L. Ritholtz, chief executive of FusionIQ, an asset management and research firm, said. “It was the height of stupidity repealing Glass-Steagall.”

The argument I made is summed up in this one paragraph:

“During the era of Glass-Steagall, there were no systemic banking crises like the one that occurred in 2008. The restrictions the bill put on the financial sector did not seem to do much wider harm. According to analysis of government gross domestic product statistics, the American economy grew an average of 4 percent a year from 1933 until 1999, when Glass-Steagall was in effect. Even some who championed repealing the act, like the former Citigroup chairman Sanford I. Weill, have since called for the breakup of the bank behemoths.”

As a more recent example, the 1987 crash never spilled over into the banking system. We had Glass Steagall to thank for that firebreak.

 

 

Source:
Senators Introduce Bill to Separate Trading Activities From Big Banks [2]
PETER EAVIS
NYT, July 11, 2013
http://dealbook.nytimes.com/2013/07/11/senators-introduce-bill-to-separate-trading-activities-from-big-banks/

 


 


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/07/the-return-of-glass-steagall/

URLs in this post:

[1] new legislation: http://www.warren.senate.gov/files/documents/21stCenturyGlassSteagall.pdf

[2] Senators Introduce Bill to Separate Trading Activities From Big Banks: http://dealbook.nytimes.com/2013/07/11/senators-introduce-bill-to-separate-trading-activities-from-big-banks/

Copyright © 2008 The Big Picture. All rights reserved.