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Glass-Steagall Is Campaign Finance Reform

posted by Adam Levitin

The financial wonkosphere just doesn't get it about Glass-Steagall.  Pieces like this one by Matt O'Brien concentrate on the questions of whether Glass-Steagall would have prevented the last crisis or whether it is better than other approaches to reducing systemic risk.  That misses the point entirely about why a return to Glass-Steagall is so important. No one argues that Glass-Steagall is, in itself, a cure-all.  Instead, the importance of a return to Glass-Steagall is political. But totally absent in much of the wonkospheric discussion is any awareness of the political impact of busting up the big banks.  

Let's be clear about why Glass-Steagall matters:  the route to campaign finance reform runs through Glass-Steagall.

By splitting up the financial services industry into squabbling factions, the result will be a substantial reduction in the influence of any particular section of the industry. Divide et impera. (See here for a more detailed discussion.) A return to Glass-Steagall is every bit as important as rolling back the Citizen's United opinion for reducing the influence of money in politics (and because of the declining marginal utility of money, the fact is that those with more money can in fact buy more influence).  

Yes, Glass-Steagall won't stop the rogue bazillionaires from attempting to buy elections, and it leaves concentrated influence uncurbed in many other powerful sectors of the economy.  But finance is the high-octane fuel for the entire economy. Reduce the volatility in the financial sector, and we'll reduce volatility across the board in the economy. A less volatile economy benefits those households with fewer means that cannot self-insure against volatility.  It is also likely to produce a more equitable distribution of wealth--there are no outsized profits to be made from speculative bubbles or from heads-I-win, tails-you-lose gambles. Robber barons thrive on volatility. 

And Glass-Steagall will also let us get to the best regulations in the financial sector.  If we want to be sure that we can get the optimal regulations, we need to create the political space for that to happen.  Without Glass-Steagall there simply will not be the political space to consider other financial industry regulations. 

So once again, with feeling:  Glass-Steagall is a political imperative for American democracy. 

Comments

Adam:

But how would G-S break up the banks to the point that it would make a material impact on the political capture problem you outline. Instead of 4 big all inclusive commercial banks with both retail and investment banking divisions, you now have 2 big commercial banks and two big investment banks. The need to grow bigger, become more efficient and internalize the costs of doing banking in America (tax, regulatory costs, and other prohibitions or expectations) is what is making smaller banks drop out.

The cost of being a banker in America is too high. It drives out the smaller banks that cannot internalize the higher costs of doing business.

Why layer on another set of G-S prohibitions that do nothing to prevent financial crisis (especially since the last few have all been Fed driven) nor fix political capture.

It seems like a waste and bad policy.

Where are all the non-central-bank-created financial crises in countries that do not have a G-S prohibition?

K

This is one of those memes that is surprisingly shallow in substance. Apparently, Goldman Sachs became the Great Octopus because of their deposit taking subsidiaries. We learned so much from this crisis.

The ran into this right after I responded to you:

http://www.nytimes.com/2015/11/25/business/dealbook/dream-of-new-kind-of-credit-union-is-burdened-by-bureaucracy.html?ref=dealbook&_r=0

The problem is too much regulation, not the lack of it, that is causing a consolidation of banking to a few major players.

K

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