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Hoenig: Roosevelt Enacted The Glass-Steagall Act, from Which Sprang Decades of Stability and Growth
19 April 2013
FDIC vice-chairman Thomas Hoenig delivered a useful "primer" on the historical hows and whys of the Glass-Steagall banking regulations, in contrast to the disastrous effects of Gramm-Leach-Bliley between 1999 and the 2007-08 crash, to the annual economics conference of Bard College’s Levy Institute on Feb. 17. Hoenig referred throughout his presentation to the problem of "financial institutions which are too big and complex," and several times showed how this resulted from Gramm-Leach-Bliley and the end of Glass-Steagall, which led to the extension of insurance/discount/bailout protection to everything these huge conglomerates wanted to do. "At a minimum, the Volcker Rule needs to be implemented as a step.... However, we would do well to go further than the Volcker Rule and move the broker-dealer and trading activities out of the banks and into separate corporate entities. With this action, you redefine the coverage of the safety net and provide opportunity for greater market discipline and, in time, greater financial stability to a broad range of financial activities. "In its simplest terms, this broader proposal would narrow the public safety net to the purpose for which it was intended. This would involve commercial banking narrowly defined: the payments system that transfers money around the country and the world, and its related intermediation process of transferring funds from depositor to borrower. Commercial banks with the protection of the safety net would again be restricted from engaging in higher risk and return activities such as trading, creating derivatives, or other broker-dealer activities that do not need government protection to function effectively." In discussing "the role of shadow banks", the FDIC vice-chairman included a "zinger" aimed at the claims (including Obama’s, Geithner’s, etc.) that the 2008 crashes occurred outside the commercial banking sector, outside Glass-Steagall’s influence had it still been in force. "It is sometimes argued that the recent crisis was related more to shadow banks outside the safety net than to commercial banks under the net," Hoenig said. "Lehman Brothers is cited as just such a case. However, Lehman was a commercial bank in the most important sense."(!) There follows a description of how Lehman, Bear Stearns, et al. used "repos" and related derivatives as if they were demand deposits in a commercial bank, and leveraged these "deposits" up to 40:1, borrowing from commercial banks. Hoenig concluded his prepared remarks by noting, "The actions of two presidents stand out as our country determines how to define the structure and role of the financial system going forward. President Teddy Roosevelt, the trust buster, changed the competitive landscape of America for the good. President Franklin Roosevelt enacted the Glass-Steagall Act, from which coincided with [sic] decades of relative economic stability and financial growth." In a brief discussion afterward with EIR on the prospects for Glass-Steagall re-enactment in the United States, Hoenig acknowledged that the Bank of England-FDIC 2012 joint paper on "bank resolution" did in fact imply that it can happen here: the seizure of bank deposits in open resolutions of large, insolvent banks. The written text of Hoenig’s presentation is here. His actual presentation to the conference deviated somewhat from the prepared text, and there was a half-hour of questions and answers that followed his presentation. The audio stream from the Levy Institute can be found here. |