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Glass-Steagall: It's the Politics, Stupid!

posted by Adam Levitin

It was like eight nights of Chanukkah in one for me watching the Democratic debate last night. There was a Glass-Steagall lovefest going on. But here's the thing:  no one seems to get why Glass-Steagall was important or the connection between Glass-Steagal and the financial crisis. The importance of Glass-Steagall was not as a financial firewall between speculative investment activities and safe deposits. It was as a political Berlin Wall keeping the different sectors of the financial industry from uniting in their lobbying efforts and disturbing the peace of the nation.

Until and unless we realize that the importance of Glass-Steagall was political, we're going to continue wasting our time debating insufficient half-measures of financial regulation like the Volcker Rule, which has the financial, but not the political benefits of Glass-Steagall. More critically, we're going to pass regulations like the Volcker Rule and then wonder slack-jawed why they don't work, as the financial industry undermines them through the regulatory implementation and legislative amendments. Financial regulation is just not that complex technically, even if if has a lot of technical rules (it's the capital, stupid!). The problem we face is not technical, but political.

By separating investment banking from commercial banking from insurance, Glass-Steagall (and I'm using the term broadly to include the McCarran-Fergusson Act) ensured that there would be turf battles between i-banks, commercial banks, and insurance companies every time a new product was developed. Each industry sector jealously guarded its priviliges (backed up by supportive regulators). This meant that there were well-heeled litigation challenges brought against any deregulation of an industry sector by regulators and members of Congress could alienate one industry sector without kissing away campaign donations from the other sectors. If the money market funds paid for some mercenary think tanker to write a policy paper urging their deregulation, the commercial banks could counter by financing their own policy paper. Indeed, skillful politicians were able to play the industry sectors off against each other, as William O. Douglas in crafting the Trust Indenture Act, in which the commercial banks agreed to some compromises to support the legislation so as to keep investment banks out of the corporate trustee business. More recently, the fight over the Durbin Interchange Amendment has featured banks vs. retailers, which is a fair heavy-weight title bout, as opposed to something like the 2005 Bankruptcy Amendments which featured banks vs. consumer groups & law professors.  

I've detailed this all elsewhere, if you want more color, but the main point here is that Glass-Steagall created a political environment that made it very difficult to deregulate the financial services industry and even allowed affirmative regulation to go through with smart politics. The demise of Glass-Steagall did not come in one fell swoop, but when the act was finally repealled in 1999, the stage was set for a massive deregulation of the financial services industry that led to the 2008 debacle. The end of Glass-Steagall meant that the financial Vultron was able to unite and push through things like the 2000 Commodities Futures Modernization Act and the 2005 BAPCPA, and to allow the OCC and OTS to pursue their preemption campaign without serious challenge.  

Unfortunately, very few politicians seem to understand that the problem we face in financial regulation is a political one. Even more unfortunately, and perhaps relatedly, virtually no one in the media gets this. The financial reporter corps and blog commentariat generally wants to focus on technical financial issues, not politics, and the political folks don't want to get their hands dirty with something technical like finance. But it is precisely this connection between finance and politics that is important in determining the financial system we are going to have. If you're concerned about income inequality and the way the financial system exacerbates it, don't look to the Volcker Rule. Look to things like Citizens United and White House personnel appointments (here too) or paid-for policy papers (here too, although at least disclosed).

Get the politics right, and the right regulation will follow. 


I agree the media is, for the most part, missing your point. Have you considered getting the message out through the Rachel Maddow Show on MSNBC? Her attention to context and continuity and her ability to make political connections understandable to voting citizens like me are excellent. Be her guest!

I've also read some of your analyses on Neil Garfield's livinglies website citings for foreclosure defense. Thank you for all your research, commitment and clarity!

You make quite the strong conservative argument for reenactment of Glass-Steagall. Political tension ensures measured steps in any direction. But I do not believe political and financial separation are different things. They are merely two sides of the same coin. Many political differences vanish once financial interests merge. Still, your point is valid.

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