Why Not Replace Dodd-Frank With Glass-Steagall?
Tho Bishop
181

Glass-Steagall cannot and should not be reinstated if it cannot be made a global effort.

By design, Glass-Steagall limited the amount of power the American banking industry could exercise over the economy as a whole. That worked well before globalization turned everything upside down: the repeal of Glass-Steagall wasn’t so much a neoliberal conspiracy as many would like to have it today than a last ditch effort to save what remained of the American financial industry from total international takeover.

Unfettered by any similar regulations, starting in the ’90s European and Japanese banks started to gobble up American investment banks and brokers. Under Glass-Steagall, investment banks in the US were banks only by name. In reality, they were a service industry severely limited in the amount of capital they could employ (and leverage).

International banks, however, were not. They still aren’t.

Reinstating Glass-Steagall or something similar in the US alone wouldn’t change a thing from the perspective of risk to the global financial system as a whole. I couldn’t care less for Goldman Sachs, JP Morgan, or Bank America but obviously a new Glass-Steagall would break them up. It then wouldn’t take long for some international bank to acquire the high risk/high reward part of the business, i.e. the investment banking part, using their considerable balance sheets once again. Nothing would change but ownership and oversight.

Finally, a rather personal observation. The ethics of the American financial industry might be flawed. But this is nothing — nothing — compared to the international and especially the Swiss, German, and French banking industry.

That said, I’m not optimistic at this point. While I believe an international regulatory construct modeled after Glass-Steagall would indeed be what’s needed in the long term I don’t think it can be pulled off at this point (or ever). Certainly not with the current administration, neither in the US nor Europe.