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Regulators have delayed the imposition of the Volcker Rule for two years, and this article presents a plausible explanation of why you should not be outraged.

Furthermore, the article links to a letter (PDF) by Robert Johnson and Joseph Stiglitz -- and if you have to choose three economists to trust in this crazy world, Stiglitz should probably be among them -- as saying that simple reimposition of Glass-Steagall would be a mistake if it worked.  The writer argues that beyond that, it wouldn't work, because banks had already found a way around Glass-Steagall prior to its elimination.

Calling all economics writers here on Daily Kos -- help me/us understand whether this is true.  If it is true, what are the implications?

That this was written for TIME Magazine's "Swampland" is not an sign that one can dismiss it out of hand.  Yes, it's a very mainstream/centrist publication and yes it does employ Joe Klein, but the writer, Massimo Calabresi, produces some pretty good stuff and is not someone whom I'd dismiss out of hand.  If it can be dismissed, on the other hand, then it should be!  This is one of the time when I'm more interested in asking questions than in answering them.

Here are some of the critical portions of the article to consider:

True, a simple idea [like the Volcker Rule] has been rendered impossibly complex as it moved from the mouth of former Fed chief Paul Volcker’s through the brains of regulators at the Office of the Comptroller of the Currency (OCC) and into hundreds of pages of vaguely worded rules. Originally, you will remember, the idea was a return to the 1938 Glass-Steagall bright-line distinction between banks that make money through lending (commercial banking) and banks that make money through investing (investment banking).

But contrary to popular opinion, the Glass-Steagall Act was rescinded not because it maintained that bright-line distinction, but because it had completely failed to do so. While some traditional banks had stayed on the “commercial” side of the Glass-Steagall line, a shadow banking system based on money market deposits and equal to or greater than the traditional one had grown up outside the Glass-Steagall restrictions explicitly to avoid them. Ultimately it was this shadow banking system’s collapse, not the commercial banks failure, that caused the 2008 crisis. Only the government’s emergency and ad hoc extension of its guarantee of deposits over the money markets in the fall of 2008 prevented a global economic catastrophe.

And then there's this:
Unfortunately, this “market making” role [of promoting efficient movement of capital through the financial system] for banks is distinguishable from trading for profit (“proprietary trading”) only by the intention of the banker doing the trading, regulators and the authors of Dodd-Frank concluded. How to judge intentions that may exist only in the opaque minds of Wall Street traders? Unlike Wittgenstein, regulators do not believe that “whereof one cannot speak, thereof one must remain silent.” Coming up with workable language to regulate trader intention is one of the primary reasons for the delay in implementing the Volcker Rule.

But just because it’s hard doesn’t mean it can’t work: even the vague preliminary Dodd-Frank moves to regulate risky trading by banks are causing some to close their proprietary trading operations. What the two-years delay really buys is time for the newly-appointed head of the OCC, Thomas Curry, who comes from the consumer-friendly FDIC, to show whether he can do better than his predecessors at crafting regulation to limit risk taking by the big banks.

I've held the popular opinion that Glass-Steagall was repealed to releash the Kraken of investment banks rather than just because it wouldn't work, and one article -- without a lot more -- is not going to change that opinion.  Nevertheless, I want to be intellectually honest and open to evidence.  Similarly, I'm one of those who has thought that "should Glass-Steagall be reinstated?" is an easy question to answer -- "yes, duh!" -- and if the criticisms above are well-placed, I want to know.  And, finally, even though this hasn't gotten a lot of oxygen in the past 24 hours, this delay of the Volcker Rule is the sort of thing about which I would expect to read all sorts of richly profane denunciations in the months ahead -- and if it's not quite so simple then I want to get ahead of the game and start to understand it.

A regular Swampland commenter named Stuart Zechmann was the first (and almost only) substantive commenter on the piece; I'm presuming that, as criticism of the article, his comment can be reproduced in whole, but if the editors want to redact it, they should go ahead.  (In any event, it's at the link.)  He says:

You write:

"contrary to popular opinion, the Glass-Steagall Act was rescinded not because it maintained that bright-line distinction, but because it had completely failed to do so"

Apart from the factual errors ("1938 Glass-Steagall", the Act was enacted in 1933) present in your piece, what evidence do you have that the authors of Gramm-Leach-Bliley --Phil Gramm, for example-- were primarily concerned with regulating financial markets more forcefully than Glass-Steagall's "bright-line" was adequate to provide?

Also, when you describe your view --that Glass-Steagall was rescinded because it didn't do enough  to proscribe harmful banking activity-- as "contrary to popular opinion," do you mean to say that your view is contrary to Joseph Stiglitz's opinion, as reported by ABC News four years ago?

http://abcnews.go.com/....

"Economic experts say that Gramm and others are to blame for the current crisis that is shaking Wall Street.

Gramm's successful effort to pass banking reform laws in 1999, which reduced decades-old regulations separating banking, insurance and brokerage activities, helped to create the current economic crisis.

"As a result, the culture of investment banks was conveyed to commercial banks and everyone got involved in the high-risk gambling mentality. That mentality was core to the problem that we're facing now," Stiglitz says.

Lakshman Achuthan, managing director of the Economic Cycle Research Institute, also asserted that Gramm was mistaken, criticizing him and economic policymakers for not taking the risk of recession seriously enough.

"There is a recession -- that is clear and it doesn't make sense to blame middle-class folks," says Achuthan. "Policy holders should be held fully accountable for letting Wall Street run amok."

Achuthan agrees that Gramm's banking reform laws helped lead to the subprime mortgage crisis as commercial banks started taking enormous risks.

"We were setting up this bonfire years ago -- the deregulation, the inordinate amount of liquidity given to the system all set the stage for the bubble and the bust," he explains. "

In case you're unfamiliar with Lakshman Achuthan, Massimo Calabresi, he's

"Lakshman Achuthan
Chief Operations Officer

Co-Founder & Chief Operations Officer of ECRI, Achuthan is the managing editor of ECRI's forecasting publications. He is also a member of Time magazine's board of economists and the Levy Institute's Board of Governors, and serves as a trustee on the boards of several foundations."

And when you claim "Ultimately it was this shadow banking system’s collapse, not the commercial banks failure, that caused the 2008 crisis," aren't you obscuring the fact that investment banks themselves, as inextricably woven as they are into the financial fabric of money-center banks (JPMorgan-Chase, Wells-Fargo, BoA, Citi, etc), were conducting great volumes of risk-laden business with the unregulated SBS? Isn't that the whole point?

Didn't Barack Obama say as much, during 2008?

"President Barack Obama argued on the campaign trail that one bill -- the Gramm-Leach-Bliley Act of 1999 -- led to deregulation that helped cause the crisis. Among other things, that law allowed for the creation of giant financial supermarkets that could own investment banks, commercial banks and insurance firms, something banned since the Great Depression. Its passage, critics say, cleared the way for companies that were too big and intertwined to fail.

The law also had limits. It cemented the Federal Reserve as the top regulator for giant firms such as Citigroup Inc. and Bank of America Corp. But it didn't give any regulator sweeping powers over investment banks such as Bear Stearns Cos. and Lehman Brothers, or standalone insurance giants like American International Group Inc."

What explains the discrepancy between "a member of Time magazine's board of economists," award-winning economists such as Joeseph Stiglitz, "popular opinion," Barack Obama circa 2008, and your view of the role of Glass-Steagall repeal in the economic meltdown, Massimo Calabresi?

More importantly, what explains the inclusion in a TIME piece of your unsupported assertions as statements of undisputed fact? Do you just not know a great deal about the topic, and are merely repeating things you've recently heard?

If Zechmann (who, by the way, to my knowledge I don't know) is right, then this story is not really about "are the reforms that you and I think that we want really quite so appropriate?", but "who is feeding bullcrap to Calabresi, for what specific purpose, why is TIME tolerating it, and what do we do about it?"

I don't know which view is correct; I don't have a lot much more to add than that.  My hope (and bet) is that some of you will.

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Comment Preferences

  •  I certainly hadn't wanted, this morning, to spend (24+ / 0-)

    time assessing whether what I thought I knew about Glass-Steagall and the Volcker Rule is correct, but TIME e-mailed me the damn article so here we are.  And now I've done I've done it to you!  Sorry, but as I say in the title, this seems important.  I hope that we'll know more about it by the end of the day than we do now.

    Democrats must
    Earn the trust
    Of the 99% --
    That's our intent!

    "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

    by Seneca Doane on Sat Apr 21, 2012 at 09:45:16 AM PDT

    •  Let Me Boil it All Down For You (8+ / 0-)

      If a financial institution is so large that its failure would threaten our entire financial system so that taxpayers would be forced to bail out that financial institution, then that financial institution is too large to exist, and should be broken up.

      This is the "Volker Rule."  It calls for breaking up "too big to fail" financial institutions.    

      The problem is that "too big to fail" financial institutions control our government to a large extent.  Thus, because they will not consent to being broken-up, the government these financial institutions control will never, never force them to be broken up.  

      So, instead of breaking up these financial institution, the government is trying to craft regulations limiting the risk they can take on.  That isn't the Volker Rule.  That's kicking the "Volker Rule" to the side and doing something else that would still allow "too big to fail" financial institutions to exist.  

      The "Volker Rule" isn't too complex to institute.  Its really quite simple.  Not instituting the Volker Rule is what's complex.  The article is really a "bait and switch" with the Volker Rule being switched for something different.      

      •  I like that take on it, but I don't think that (4+ / 0-)
        Recommended by:
        TimmyB, ChiTownDenny, FarWestGirl, G2geek

        that is actually how the term "Volcker Rule" is used, especially re Dodd-Frank.  From the Wikipedia article:

        The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.[1] Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.[2][3] The rule's provisions are scheduled to be implemented as a part of Dodd-Frank on July 21, 2012[4], with preceeding ramifications.[5]

        Volcker was appointed by President Barack Obama as the chair of the President's Economic Recovery Advisory Board on February 6, 2009. President Obama created the board to advise the Obama Administration on economic recovery matters.[6] Volcker argued vigorously that since a functioning commercial banking system is essential to the stability of the entire financial system, for banks to engage in high-risk speculation created an unacceptable level of systemic risk.[7] He also argued that the vast increase in the use of derivatives, designed to mitigate risk in the system, had produced exactly the opposite effect.[8]

        Maybe the term is being bastardized, but I don't know that it's appropriate to say that it just means "break up the big banks," although obviously limiting trading for profit -- if Calabresi is incorrect is saying that that requires peering into the souls of the people making trades to determine their intent -- would have that effect.  I'm not sure that the remains would no longer be "too big to fail" (and I'm damn sure they would still be large enough to massively influence the government.)

        Democrats must
        Earn the trust
        Of the 99% --
        That's our intent!

        "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

        by Seneca Doane on Sat Apr 21, 2012 at 10:39:58 AM PDT

        [ Parent ]

        •  "Volker Rule" Part of Ending "Too Big to Fail" (2+ / 0-)
          Recommended by:
          Seneca Doane, FarWestGirl

          I think you may be right in that Volker, in his own words here, wrote about a series of regulations meant to end "too big to fail."

          The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.
          The further proposal set out by the president recently to limit the proprietary activities of banks approaches the problem from a complementary direction. The point of departure is that adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense, not when those risks arise from more speculative activities far better suited for other areas of the financial markets.
          Later, Volker states:
          There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.
          Volker NYT Editorial

          It seems Volker wanted to both prevent banks from trading for their own accounts, and to limit the size of financial institutions.  As far as which one became known as the "Volker Rule" you may be right.  

          My point is that one part, whereby the government takes on large financial institutions and forces them to shrink, seems to have been forgotten.      

        •  That's correct. (4+ / 0-)

          The Volker Rule was established to address proprietary trading with a banks own funds.  As I pointed out elsewhere, some may recall that Goldman Sachs provided "derivative securities" to its clients and then, using its own money, bought counter-position "derivative securities" to that which it sold to its customers.  The Volker Rule curtails this.  Link.
          I should also point out that, once again elsewhere, it was addressed to me that the Volker Rule was being "scaled" back.  I pointed out that what was included in Dodd-Frank was a generalized outline and therefore the date of implementation and specifics are still being addressed, not necessarily scaled back or pushed out for implementation.
          Finally, many on this site believe the repeal of  Glass-Steagall precipitated our recent financial calamity.  I have on multiple occassions attempted to point out that this simply is untrue, as your Time article, while not being very detailed, points out.

          Koch Industries, Inc: Quilted Northern, Angel Soft, Brawny, Sparkle, Soft 'n Gentle, Mardi Gras, Vanity Fair, Dixie

          by ChiTownDenny on Sat Apr 21, 2012 at 12:06:26 PM PDT

          [ Parent ]

        •  AT&T was broken up for less. (4+ / 0-)
          Recommended by:
          TimmyB, socalmonk, cynndara, Seneca Doane

          AT&T was broken up for the pure policy reason of fostering competition in telecommunications services.  

          From my 30 years in the industry, the results have been mixed at best and catastrophic at worst.  The entire spectrum of risks under the heading "cybersecurity" is one of the direct outcomes that would not have existed under a unified communications utility managed according to sound engineering principles.  In other words, when you get spam, phishing emails, and malware attacks, you can thank the breakup of AT&T for that.

          So here we have TBTF banks whose operations are not geared toward maintaining the integrity of the financial system, but quite the reverse: they are the equivalent of their own cybersecurity threat, with catastrophic consequences as we have seen.

          If there was ever an industry in need of having its "bigs" broken down into manageable pieces that could be regulated, resuscitated when needed, or allowed to die off when necessary, finance is definitely the one.  

          "Minus two votes for the Democrat" equals "plus one vote for the Republican." Arithmetic doesn't care about your feelings.

          by G2geek on Sat Apr 21, 2012 at 06:45:36 PM PDT

          [ Parent ]

      •  In another context (6+ / 0-)

        the lawyer Clarence Darrow was asked why at the time he supported government ownership of the railroads.  Because, he said, he did not support railroad ownership of the government.

        I am not for nationalized banks, but the comment is more than applicable.

        The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

        by fladem on Sat Apr 21, 2012 at 12:17:23 PM PDT

        [ Parent ]

  •  TIME article is profoundly Wall Street-biased... (15+ / 0-)
    ...Ultimately it was this shadow banking system’s collapse, not the commercial banks failure, that caused the 2008 crisis. Only the government’s emergency and ad hoc extension of its guarantee of deposits over the money markets in the fall of 2008 prevented a global economic catastrophe.

    The question the Volcker Rule ultimately has to answer is “Who gets to stay under that umbrella of government safety?” Put another way, “how much risk taking in service of market efficiency are American’s willing to backstop?”

    This is ultimately a philosophical question, but the left-right spectrum is narrower than you might expect. To simply reinstate a Glass-Steagall prohibition on trading by commercial banks is unacceptable even to die-hard supporters of the Volcker Rule on the left. Barney Frank, Robert Johnson, and Joseph Stiglitz, for example, are all on the record saying [.pdf] that commercial banks must be allowed to trade on the market in order to perform their most important function: allowing the efficient movement of capital throughout the financial system...

    Frankly, to get into a long, drawn-out response here (which is the ONLY type of response that would do it justice), is pretty much redundant, with not just my own, but the sentiments of dozens of other Kossacks.

    Here's a one sentence response which trumps any "selected" quotes from Stiglitz, and an underlying theme of virtually everything for which he stands: BREAK UP THE BIG BANKS...NOW!

    Cleave off their prop trading (internal/in-house portfolio investment desks), eliminate all high-risk-related investing and products (i.e.: at the very least naked Credit Default Swaps, etc.) from their business realm, etc., etc., etc.

    Remember the call for: "It's time for banks to the banks to get boring, again!"

    I'm kind of surprised that this diarist--whom I respect immensely--would be taken in by this Wall Street meme.

    And, even IF the Volcker rule was not "delayed" another two years, the fact remained that the banks, under the original legislation in Dodd-Frank, had something like 8-10 YEARS to get their ratios (cash-to-Tier I assets) in order.

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Sat Apr 21, 2012 at 10:00:45 AM PDT

    •  The answer is to your last questions is to... (12+ / 0-)

      ...keep our eyes on the proverbial ball. There's nothing new here in this article. It's just a right-wing meme delivered up by one of the largest, corporatocratic media outlets in the country.

      That's it, plain and simple.

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Sat Apr 21, 2012 at 10:07:14 AM PDT

      [ Parent ]

      •  s/b "The answer to your last question is to..." (9+ / 0-)

        Correcting headline of my comment...and continuing comment here...

        The administration, along with the House and the Senate, are all but entirely capitulating to Wall Street...exactly as many have been ranting about for the past four years.
        This is something I’ve been writing about, along with many others in this community and in the blogosphere, for many years…one of the biggest inconvenient truths about U.S. government, today: “Wall Street’s Big Win,” Matt Taibbi, Rolling Stone

        …Democrats had sold the public on the idea that it was the Republicans who were killing progressive initiatives. In reality, Republican and Democratic leaders were working together with industry insiders and deep-pocketed lobbyists to prevent rogue members like Merkley and Levin from effecting real change. In public, the parties stage a show of bitter bipartisan stalemate. But when the cameras are off, they fuck like crazed weasels in heat…
        And, blaming it all on Citizens United (although this certainly exacerbated the situation), is somewhat of a copout, since the same folks that bankrolled the 2008 presidential race are bankrolling the 2012 race. They just have fewer rules and oversight.

        In short, what you see is what you get. Our government is corrupt at every level...and that is the biggest bipartisan truth of all.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Sat Apr 21, 2012 at 10:20:56 AM PDT

        [ Parent ]

      •  The "new" thing is the two-year delay (6+ / 0-)

        which, I have to admit, I found shocking.  Calabresi says "don't worry about it"; I'm not convinced.  I leave it to readers to decide whether, from their less expert perspectives, they found "nothing new here."

        I deal in politics, not economics.  "Explained elsewhere" != "sufficiently explained."

        Democrats must
        Earn the trust
        Of the 99% --
        That's our intent!

        "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

        by Seneca Doane on Sat Apr 21, 2012 at 10:27:12 AM PDT

        [ Parent ]

    •  Agree mightily with all your wrote except this (10+ / 0-)
      I'm kind of surprised that this diarist--whom I respect immensely--would be taken in by this Wall Street meme.
      The diarist is asking for feedback, so I think you went a little far with 'taken in by this Wall Street meme.'
    •  I posted this one to elicit criticism of the story (5+ / 0-)

      just like what you've provided, Bob.  It's out there in a well-read national publication.  You know that we're going to be hearing both criticism of this delay on the left and pushback from the right along these lines saying that the left is ignorant of the true facts.  I'm not as expert as you on these matter -- and I'm very glad that you showed up so quickly! -- but I know when it's time to make sure that we have our act together.

      I don't recall specific refutations to some of the points raised in his article -- so I'm calling for us to get our act together.  This means no only knowing that those who are familiar with these issues, like you, understand the argument here, but to ensure that many more people do.

      I take it that you think that the delay discussed in the story is wrongheaded -- in which case I look forward to reading your "long and drawn-out" (and all the more useful for being so) take on the delay of implementation of this policy.

      Democrats must
      Earn the trust
      Of the 99% --
      That's our intent!

      "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

      by Seneca Doane on Sat Apr 21, 2012 at 10:24:24 AM PDT

      [ Parent ]

      •  I kind of answered this comment, in my comment... (3+ / 0-)
        Recommended by:
        Seneca Doane, FarWestGirl, G2geek

        ...immediately, above....my apologies, but I'm simultaneously running around like a chicken with my head cut-off on a Saturday afternoon to tend to stuff around the homestead...we have a few hours until something like 6 inches of rain starts hitting us for the following 48+ hours after that, so I'm told. (We need the rain here, an hour north of NYC.)

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Sat Apr 21, 2012 at 10:46:27 AM PDT

        [ Parent ]

        •  One last thing, before I split for Saturday... (10+ / 0-)

          ...chores.

          The all but total capitulation of Congress, and (frankly) talking points aside, the White House, on Dodd-Frank, is one of the biggest travesties that's going to bite Dem's in the ass this year.

          At best (if you buy into the talking points), our Party appears as impotent in terms of being enabled to stand up to Wall Street, and at worst (which is the truth) we're almost as guilty as the other side, corruption-wise. (Not quite as bad, but almost.)

          The system is rotten to the core. That is the simple and ugly truth.

          Take a look at the mortgage "settlement," take a look at the virtually complete evisceration of Dodd-Frank, take a look at the $250 billion per year in ongoing Wall Street bailouts (stealthy and overt) since 2008, etc., etc.

          Campaign financing reform, ethics laws with teeth in them, jail for the bank fraudsters, break up the big banks, a fairer income tax framework, etc., etc., etc.

          The answers to these problems are known...and widely discussed, even here, by many.

          Speaking of "many," I'm growing more and more tired, by the day of late, with all of the bullshit excuses, too.

          "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

          by bobswern on Sat Apr 21, 2012 at 10:54:07 AM PDT

          [ Parent ]

  •  Glass-Stegall is needed (4+ / 0-)
    Recommended by:
    Seneca Doane, PvtJarHead, Sean X, G2geek

    People need to know that when they go into a bank, their accounts are protected and insured.  

    Right now, they're entering high risk territory where friendly looking, smiling "bankers" get commissions when they steer you out of safe accounts and into what are nice sounding Wall Street gambling schemes designed to enrich the financial institution rather than the customer.  And, since the "banks" have a feduciary responsibility to their shareholders, rather than their customers, they don't have their customers best interests in mind.

    Glass Stegall would bring sanity back to banking and provide the much needed separation that doesn't exist anymore.  It would ensure that customers quickly know if their money is safe because banks would be for banking only.  The Wall Street accounts would be available at an "investment bank" in a separate facility.

    If they want to gamble with their retirement or college funds, they need to know they are gambling.  Right now they don't.

    There already is class warfare in America. Unfortunately, the rich are winning.

    by Puddytat on Sat Apr 21, 2012 at 10:18:30 AM PDT

    •  One thing that was new to me (4+ / 0-)
      Recommended by:
      Puddytat, maryabein, FarWestGirl, G2geek

      (though I can't say that I haven't read it before; it may just not have stuck with me) is the assertion that there was some shadow system that meant that Glass-Steagall had already been gutted by the time it was eliminated.  That just doesn't match my memory of the politics of the time.  If it's a lie, then it's a pretty audacious one -- and it demands an appropriate response.

      Democrats must
      Earn the trust
      Of the 99% --
      That's our intent!

      "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

      by Seneca Doane on Sat Apr 21, 2012 at 10:31:11 AM PDT

      [ Parent ]

      •  I don't think that's true (5+ / 0-)

        Banks were banks and Wall Street investment houses were Wall Street investment houses.  Phil Graham took down Glass Stegall so they could merge their operations.

        Banks wanted all the profits and fees that the investment houses had and the investment houses wanted the veneer of respectability that the banks had (plus access to all the banks customers so they could get them to switch their accounts from safe banking to investment banking).  It was the customers who lost out while the financial industry won.

        Glass Stegall kept the 2 parts separate and did a good job of it.  That's why the financial industry had to get rid of it and when our economic condition worsened for us.

        There already is class warfare in America. Unfortunately, the rich are winning.

        by Puddytat on Sat Apr 21, 2012 at 10:50:57 AM PDT

        [ Parent ]

        •  The assertion in the article is that by the time (4+ / 0-)

          of its repeal, Glass-Steagall no longer "did a good job of it," because banks had figured out effective ways to evade it.  This seems plausible to me (having seen big-firm lawyers figure out evade all sorts of things), but that doesn't make it true.  If it is true, though, it seems like it something that we, in good faith, should figure out how to address.  If it's not true, then it's a pretty monstrous lie, and Calabresi and whoever is feeding him such tripe should be taken to task over it.  What struck me is how powerful the argument is, if true, and how it thereby raises the stakes.

          Democrats must
          Earn the trust
          Of the 99% --
          That's our intent!

          "I love this goddamn country, and we're going to take it back." -- Saul Alinsky OCcupy!

          by Seneca Doane on Sat Apr 21, 2012 at 11:12:20 AM PDT

          [ Parent ]

      •  yeah me too, though in retrospect... (1+ / 0-)
        Recommended by:
        Seneca Doane

        I hadn't heard specifically about this dodge, but in retrospect it makes sense.  People pursue the exercise of their will regardless of obstacles, like water escaping through any crack in a dam.  Some can be stopped by social pressure, some by ethical limits, some by legal limits, but some could care less about any of the above.  And when the incentives are sufficient, they attract the latter.  

        "Minus two votes for the Democrat" equals "plus one vote for the Republican." Arithmetic doesn't care about your feelings.

        by G2geek on Sat Apr 21, 2012 at 07:02:46 PM PDT

        [ Parent ]

  •  Nouriel Roubini thinks it can, (8+ / 0-)

    and should be done, he even advocates "Glass-Steagal on steroids." The problem is not so much too big to fail, but too inter-connected to fail.

          Even more radical reforms must be implemented as well. Certain institutions considered too big to fail must be broken up, including Goldman-Sachs and Citigroup. But many other, less visible firms deserve to be dismantled as well. Moreover, Congress should resurrect the Glass-Steagall banking legislation that it repealed a decade ago but also go further, updating it to reflect the far greater challenges posed not only by banks but by the shadow banking system.

                                                     Crisis Economics, Roubini & Mihm, 2010

    The paragraph beginning "But contrary to popular opinion ..." seems to me to be deliberate misrepresentation of the history. Glass-Steagall wasn't repealed because it failed. The law was flaunted deliberately with the Citi/Traveler's deal, which was clearly illegal.

    The GOP ... Government of the 1%, by the 1%, for the 1%

    by Azazello on Sat Apr 21, 2012 at 10:47:10 AM PDT

  •  There is a sort of regulatory two-step (7+ / 0-)

    that is played by lobbyists.  

    1.  Your regulation is outdated because we have found ways around it.
    2.  Because we have figured a way around it, you should get rid of it.

    The blanket statement that Glass-Stegall wasn't working is this two-step in operation.  

    I posted in another thread a comment about financial regulations and future shock, and this is a prime example.  And Johnson and Stiglitz note that "banks have taken refuge in complexity to extract massive margins and fees..while avoiding the harsh sunlight".  At page 3.

    This complexity isn't a bug, it is a feature to allow traders to get bonuses while hiding the true risk of their activities even from their firm's risk managers.  Stiglitz is in support of the Volcker rule, and argues that the reason the implementation is complicated is because the banks and traders are actively trying to make it so.  The article really misses that part of what Stiglitz is saying, and in the end I think doesn't really come to grips with the point.

    I really wish everyone would read the paragraph in Stiglitz's article that begins on page 6.  They note:

    "This [the complexity of financial transactions] is a driver of systemic risk because without clarity with regards to capital, it is impossible to determine if a firm is near failure.  This means "prompt corrective action" cannot be effected, and resolution is simply becomes an exercise in the application of political power - a dangerous proposition in a post-citizen's world.."

    "Prompt Corrective Action" is a phrase from the banking laws (I know banking law).  It involved the windup of banks that are in financial trouble.  This was the typical process for dealing with a troubled bank.  But in a world where banks are so tightly wound in a web of cross-capital transactions, the old tool becomes useless.  This is why the TARP was used and not the FDIC fund (and which William Black keeps failng to understand) - no one really knew (including the banks themselves) what the real risk was.  So when the panic hit, the choices were all bad.

    In many ways Stiglitz has captured the issue at hand in one paragraph: and I have read books that have explained the issue not as well.

    FWIW.

    The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

    by fladem on Sat Apr 21, 2012 at 11:02:53 AM PDT

  •  i think both are mostly correct (3+ / 0-)
    Recommended by:
    Seneca Doane, FarWestGirl, G2geek

    in their own way.

    the shadow banking system did exist unregulated and we knew this back in the 90's.  saying they passed Gramm because it didn't regulate this new shadow banking system is wrong.  they passed it because they wanted to break down barriers, let the money flow and get their pockets greased in the process.  however, it is true that the shadow banking industry existed because there were not regulations yet.  both parties are to blame but remember we're talking fancy financial instruments only the rich knew about.  both parties have been easily captured by wealthy powerful interests.

    i do think that properly regulating these industries requires time to work out appropriate regulations.  agree that we have to get those barriers back up but also know that unwinding the damage takes time.  hopefully, this will be part of campaign.  would make a good question for the debate.

    -You want to change the system, run for office.

    by Deep Texan on Sat Apr 21, 2012 at 11:30:51 AM PDT

    •  in which case the remedy is: (3+ / 0-)
      Recommended by:
      socalmonk, Seneca Doane, cynndara

      What you just said was that the sheer complexity of the financial system allowed the creation of various types of entities and instruments that regulators did not anticipate, or possibly could not have anticipated.

      OK, so the answer to that is to replace the financial regulatory paradigm as follows:

      Old:  You can do anything except what is specifically forbidden.

      New: You can do only what is specifically allowed.

      In other words make it similar to the FDA: any new pharmaceuticals have to pass strict testing and scrutiny as to safety and efficacy.  That is, any new financial instruments have to pass strict testing and scrutiny as to safety and efficacy.  And as with medications, financial instruments that are allowed should be required to carry "package inserts" stating clear warnings in plain language.

      "Minus two votes for the Democrat" equals "plus one vote for the Republican." Arithmetic doesn't care about your feelings.

      by G2geek on Sat Apr 21, 2012 at 07:11:49 PM PDT

      [ Parent ]

  •  I wish (2+ / 0-)
    Recommended by:
    Seneca Doane, G2geek

    everyone would just call or fax their elected reps and inquire as to their position on H.R.1489 Return to Prudent Banking Act of 2011

    purpose being to make the people's voice heard.

    Info at the link (note it has 58 cosponsors already.)

    That's the bottom line.

    Please.

    Resistance Is Fertile - Occupy

    by Sean X on Sat Apr 21, 2012 at 12:04:38 PM PDT

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