Terry Gilliam's new film, "The Zero Theorem" will be familiar to his fans.
Four senators, including Democrat Elizabeth Warren and Republican John McCain are proposing “The 21st Century Glass-Steagall Act” to force Wall Street to separate traditional banking from speculative investment.
Under the proposed legislation, banks which take federally insured deposits would be barred from most forms of risky investments, including trading in derivatives, dealing swaps, operating hedge funds and private investment entities.
The bill is named after the landmark 1933 law that placed strict limits on what banks could do. That act was repealed in 1999 as the modern finance industry with mega banks that performed multiple functions was taking shape.
Requirements in the new bill would force large banks to split up into fully independent businesses. Critics say that would hurt consumers who have been helped by the low interest rates, which are in part made possible by banks trading in financial instruments that reduce risk and costs.
Simon Johnson/Bloomberg “The biggest U.S. banks have become too big to manage, too big to regulate, and too big to jail. At a stroke, the proposed law would force global megabanks such as JPMorgan Chase and Bank of America to become smaller and much simpler — divorcing high risk activities from plain-vanilla traditional banking. Their failures would no longer threaten to bring down the economy.”
Bloomberg “A new bill proposed by, among others, Senators John McCain and Elizabeth Warren, misses the point about what caused the financial crisis. The so-called Glass-Steagall 2 would do nothing to protect us from the devastation we recently experienced. Worse, it threatens to distract attention away from legitimate reform efforts.”
National Review “Whatever the exact fix, the McCain-Warren bill, along with a bank-overhaul proposal from Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a sign that Washington increasingly sees Dodd-Frank as the beginning rather than the end of broad financial reform. And now it might be time for a sequel.”
JEREMY HOBSON, HOST:
Well, today Goldman Sachs posted a profit of nearly $2 billion for the second quarter. That is double what the investment bank made during the same period last year, which brings us to another story out of Washington, this one coming from a bipartisan group of senators, including Democrat Elizabeth Warren and Republican John McCain to introduce a new Glass-Steagall Act to break up the biggest banks on Wall Street.
Under the proposal, banks that take federally insured deposits would be barred from most forms of risky trading. It is named of course after the landmark 1933 law that placed strict limits on what banks could do. That act was repealed in 1999. Economist and MIT Professor Simon Johnson is with us now, and Simon, how far would this new law go towards addressing some of the problems that you see in the financial system?
SIMON JOHNSON: Well, the key problem is that banks have an incentive to get government guarantees, implicit and explicit, for example through having insured deposits, and then going out and taking tremendous bets. Now when those bets go well, as they've gone well for Goldman Sachs this quarter, they make a lot of money, they have high profits.
When those bets go badly, that problem is our problem, it's a problem for the taxpayer, it's a problem for the Federal Reserve. So they get the upside; we get the downside. That's what it means to be too big to fail. The new Glass-Steagall would address that, would make it harder for them to gamble with taxpayer money.
HOBSON: But it would not be impossible for them to do so.
JOHNSON: Well, unfortunately finance is very complex, and it's always possible to find your way around rules. The key thing about Glass-Steagall, combined with other proposals coming from the Senate, bipartisan proposals, is that it would send a very clear message to the regulators, to the Federal Reserve and others, that they must clamp down, they must prevent the banks from playing these games.
HOBSON: Well, I want to go through some of the criticisms because there are many, and I want to start with the idea that if we put these kind of limits on our banking system, we will not be as competitive with banking systems in other financial centers around the globe.
JOHNSON: Well that's incorrect. I mean, if you look at the restrictions we already - look at the restrictions we had in the past, prior to the breakdown of Glass-Steagall, we built the world's most dynamic, competitive, productive economy with those restrictions. It is not the case that you want your banks to run crazy schemes. That almost always backfires massively. That's what's happened to the Europeans, by the way. We should absolutely not seek to emulate them.
HOBSON: Well, I'm sure there are many on Wall Street who would not consider derivatives trading crazy schemes.
JOHNSON: Some moderate degree of using derivatives in a transparent fashion, traded through markets, that's fine, and that's completely consistent with the new Glass-Steagall. In fact the language of this legislation has been quite meticulously updated to reflect the fact that banks and others have legitimate hedging needs.
But they don't - we don't want them to gamble with taxpayer money and taking inordinate risks through highly leveraged positions in their derivatives business.
HOBSON: What about the idea that this would not have stopped the crisis from happening? And this is something we hear very often, that banks or financial firms like Countrywide and Washington Mutual and Wachovia were not participating in the same kind of risky trading that was going on at Lehman Brothers or Goldman Sachs or some of the investment banks?
JOHNSON: First of all, you should never believe anyone who says they have a panacea that would have prevented previous crises or future crises. That's an illusion. You're looking for a package of measures that would be helpful. And in any discussion of the previous crises, you have to focus on Citigroup. Citigroup was the leader in the charge under Sandy Weill, leader of the charge against Glass-Steagall, removing the last vestiges of it at the end of the 1990s.
And Citigroup used that opportunity to become much bigger, to take on crazy risks funded with this taxpayer backstop. Even Sandy Weill, the man who was head of Citigroup when they were pushing for the final repeal of Glass-Steagall, now says that was a mistake, and we should make the banks get smaller.
So, you know, I really don't understand the argument that this wouldn't help. It would help, would've helped in the past, would help in the future. It is not a panacea. You need a lot of other measures at a legislative level and at the regulation level if you're really going to make the financial system safer.
HOBSON: What about the idea, Simon Johnson, that ordinary people benefit from banks being able to do this kind of trading because in the good times, at least, they do better, they've got more capital, they can lend more money?
JOHNSON: Well of course that was the argument, one of the arguments Sandy Weill was using in the 1990s. You know, let us do everything possible, imaginable, expand business of banking, and we the bankers will serve the real economy, ordinary Americans, better. So was the - exactly the proposal and the argument that persuaded Republicans and Democrats to support the repeal of Glass-Steagall.
And we have the evidence in front of us. We've just experienced the most serious, devastating recession, loss of employment, since the 1930s. How many more times do we need to do that before we understand that banking has become too big and too dangerous?
HOBSON: So do you think that there's any chance that first of all this kind of legislation could get through Congress?
JOHNSON: Yes, I think this kind of legislation really could get traction. It's got bipartisan support, the support of Senator McCain. Actually, Senator McCain has been pushing the idea for quite some time. It's got Senator King, an independent, Senator Warren, Senator Cantwell, Democrats, as sponsors. And I think that a lot of people are frustrated with the pace of financial reform.
Dodd-Frank reforms, passed in 2010, three years ago, had some good ideas. They've really run into massive pushback from the industry. The regulators have not been uniformly strong, let's be polite, in pushing forward the necessary measures. This new 21st-century Glass-Steagall would absolutely send the right message to everyone involved in regulating the financial sector.
HOBSON: Well, that's my last question. I mean, could this get through Wall Street? The financial industry has been very effective in watering down and limiting the restrictions in the Dodd-Frank financial reform bill. Many of them haven't even been finalized yet.
JOHNSON: That's correct, and you should expect an enormous pushback from Wall Street at all levels, overt and covert, against this legislative proposal. But I would remind everyone that slightly more than 100 years ago there was a similar pushback against the initial proposals and laws that led to what we now regard as sensible antitrust framework in this country.
The more the big monopolies in that day pushed back, the more they showed their power, their political and economic power, the more people began to understand that structures such as Standard Oil had become too big to help the rest of America. It was fine for John D. Rockefeller, but for everyone else it wasn't so good.
That company was broken up into 34 or 35 separate pieces, most of which went on to do very well. That's the kind of proposal that's now on the table with regard to our financial system.
HOBSON: Simon Johnson, former chief economist with the IMF, now a professor at the MIT Sloan School of Business, Simon Johnson thanks so much.
JOHNSON: Thanks for having me.
HOBSON: And Robin, while we're talking about ideas for new regulations on Wall Street and the power of the financial industry, we're going to hear in a moment from someone who used to work in that industry.
ROBIN YOUNG, HOST:
Used to is the operative word there.
HOBSON: Yeah, exactly. I found him in Chicago now. That's where he is now. He was working for Lehman Brothers before the collapse. He was laid off. He is now in the trauma unit of the Cook County Hospital in Chicago. So that's coming up. Quite a career change, in a moment.
YOUNG: We should say he's a doctor there.
YOUNG: You will have his story. That's after the break, HERE AND NOW. Transcript provided by NPR, Copyright NPR.