by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Some pundits have argued that the federal government should restore so-called “Glass-Steagall” rules to prevent another American financial crisis. C. Wallace DeWitt explains in a Federalist column why reinstatement of those rules would not yield the results advocates want.
Muddled thinking about banking is ascending across the political spectrum. From Bernie Sanders and Martin O’Malley to Mike Huckabee and Rick Perry, politicians of all stripes are suggesting (or flat-out stating) that the partial repeal of the Glass-Steagall Act—the 1933 law that established the separation of “commercial” and “investment” banking—by the 1999 Gramm-Leach-Bliley Act (GLBA) gave rise to the financial crisis of 2008-09. Nothing could be farther from the truth, but there is a lot of political star power behind this populist fantasy.
Exhibit A: Senators Elizabeth Warren (D-Massachusetts), John McCain (R-Arizona), Maria Cantwell (D-Washington), and Angus King (I-Maine) have gone so far as to sponsor tri-partisan legislation entitled the “21st Century Glass Steagall Act,” which Sanders has made the centerpiece of his Wall Street “reform” agenda.
The act purports to restore Glass-Steagall—which would be bad enough—but would in fact impose constraints even more severe than the original law. Its sponsors regularly demonize the GLBA, despite the fact that one of them (McCain) voted for its passage in 1999.
To Hillary Clinton’s credit, the “glass ceiling” is not the only vitreous feature of our national architecture that her presidential campaign is inclined to smash. When the question has arisen in the Democratic primary debates, Clinton distanced herself from the pro-Glass-Steagall crowd, although her statements on the matter tend to make vague and ominous reference to a “more comprehensive approach” to financial regulation. (One does suspect, too, that her husband’s role in signing GLBA may have something to do with her somewhat halfhearted defense of the law.)
While Wall Street bears the brunt of popular anger over the events of 2008-09—some of it justified—many other streets did not exactly cover themselves in glory in the run-up to the financial crisis. Pennsylvania Avenue, Constitution Avenue, K Street, and, yes, Main Street spring to mind. Bankers and ratings agencies and mortgage originators, politicians and regulators and lobbyists, community groups and homeowners, Fannie Mae and Freddie Mac—we all have cause to repent of our manifold sins and wickedness.