Saturday, December 26, 2009

Glass Stegall Act

Last week, lawmakers including Senator John McCain proposed reinstating Glass-Steagall, which was struck in 1999 by the Gramm-Leach-Bliley Act.

The repeal led to a rise in conglomerates including Citigroup that were allowed to branch into insurance and proprietary trading.

Paul Volcker, a legendary former chairman of the Federal Reserve Board, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933


wjsim said...

I may be wrong here.

Glass-Steagall came together with the FDIC. When Glass-Steagall was repealed, FDIC however remained. Without consumer fear regulating the banks, the banks were reckless with deposits since consumers could not care less what happens to the banks as deposits were insured.

An alternative would be to scrap FDIC. Less bureaucracy, less tax, more efficiency.

Yes, Paul Volcker with his 20% interest rates. He is what we need to bring sense to the American economy. I would say he is the only chairman to do the right thing, and not the popular thing. Unlike the current Time's Man of the Year...

Ghim Moh Resident said...

Hi Mr Tan,

I rather have this Glass Stegall Act reinstated than what the US Senate is pushing through in Healthcare.

Sadly, I don't see much chance of this Glss Stegall Act reinstated in this Obama Administration. We have all been fooled by this Obama Administration.

There is no change, just the repeating of the same mistakes that bought us into this financial mess. The increase in spending, the Iraq pullout that never happen, the addition of more troops in afghanistan, bailouts of failed companies that prevented successful companies to become bigger, still a low rate of savings, an even lower rate of interest than the Bush Administration. I can just go on and on about their problems. There is alot of people in America homeless and without jobs. Unemployment in America is certainly more than the reported 10%.

This economic crisis is just the beginning and will become greater than the great depression in the 1930s.

We will start preparing for that day and one way is to buy Gold. I support farming too. If we can reserve some of our islands for the military, we can also reserve some islands for farming so that we Singaporeans will not have to rely so much on overseas for our food. I still waiting for a day where someone suggest this in the Parliament.

Ghim Moh Resident said...

Hi Mr Tan,

All of us should read this book.

America's Great Depression by Murray N. Rothbard.

It can be bought in or you can find it online.

There has been very few books written about the Great Depression and this is the one of the few.

Read it and you will find out the bernankes and timothy geithners of the 1920s. Adolf Hitler was also Time's Man of the Year...

The great depression which started in 1929 only ended around 1945 after WW2. It just scared me what will happen in 10 to 15 years time of this crisis which started erupting in 2008.

Thats why we should start making preparations and also pray hard.

Ghim Moh Resident said...

To add further, this book "America's Great Depression" by Murray N.Rothbard is about 347 pages and I personally don't find it that easy to read.

However, you will find alot similarities in the 1920s and now.

All of us interested in America's finance history should read this book. Its good.

Anonymous said...

Glass-Steagall, FDIC, Social Security, MedicAid, minimum wage etc were all implemented in the aftermath of the 1929-1932 stock market crash and the years of great depression that followed.

FDIC was primarily to protect individuals and SMEs against bank failures. Glass-Steagall was to separate between the traditional commercial banks and the riskier investment banking activities.

Unfortunately, with high-speed modern technologies and 2 decades or more of financial "innovation" the original Glass-Steagall Act will be obsolete to shield the man-in-the-street from the myriad intertwining of financial "relations", making use of commercial laws, special investment vehicles, off-balance sheet conduits, derivatives, "dark pools", slicing and dicing of financial risks etc. Lawmakers will need to update the original Act to have the necessary effect in this age.

Some industry observers also proposed bringing back the partnership structure for investment banks, similar to accountancy firms and law firms. This structure was compulsory in years past and a large percentage of the senior management's own wealth had to be part of the investment bank itself. Thus management (and by extension their own family's economic welfare) has to take on the risks of their bank's activities. This will align the management's own interests with the investment banks's survivability and long-term performance.

The dissolution of the partnership structure for investment banks and the repeal of Glass-Steagall ultimately led to hiving off investment risks to shareholders, breeding of short-term mentality to maximise quarterly/half-yearly/annual bonuses, taking advantage of commercial banking capital largely belonging to individuals and SMEs, with final outcome being risks having to be borne by the overall financial system itself.


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