What Glass-Steagall 2.0 Would Mean

This morning I was walking out of RussiaToday’s studios after doing an interview giving my predictions for the economy 2010 when one of the other guests introduced himself and complemented me on my presentation. In my interview I had criticized the House bill has formalizing “too-big-to-fail” policy, and not dealing with the real problems. “You’re absolutely right,” he told me. “The banks have bought Wall Street.” I agreed with him and was about to leave when he added, “I mean, seriously, where is Glass-Steagall? Bring back Glass-Steagall!”

Sadness washed over me.

The collective distaste for bank bailouts is coming from two different perspectives. One has a negative view of corporate success, profit, and faux-capitalist tendencies. The other believes in real competition as a catalyst for economic growth, thinks it is better to allow banks to fail (at least in an orderly way), and doesn’t like taxpayer money going to save Wall Street (or Main Street). The idea to bring back Glass-Steagall is steeped in the former’s notions—break up the big banks, limit their profitability, and keep everything small to save the economy. This is sadly misguided… if we want to have the best possible economic growth carry us into the new decade.

To begin with, having Glass-Steagall in place wouldn’t have saved us. I’ve written before about how the Gramm-Leach-Bliley Act’s repeal of Glass-Steagall may have helped save some firms by using the capital of deposit bearing businesses within mega-corporations to sustain struggling investment arms. In addition, European forms of Glass-Steagall didn’t seem to help them, and they would have had a recession giving their asset bubbles even without the U.S. going belly-up.

But more to the point, Glass-Steagall won’t save us. It won’t prevent another crisis. It won’t keep firms from becoming so large that their failure impacts the market. It won’t stop bonuses (which shouldn’t be demonized by the way). It won’t stop the trading of complicated derivative products (which shouldn’t be banned anyway).

So what would it do?

GLBA allowed for different types of banks to team up to merge their core competencies and offer more services to the global public. Prior to GLBA, America’s banks did not have the capacity to meet the mortgage demand that soon swept down on them. Despite the frequent criticisms of over-leveraging (which are justified), the concept of leveraging is not bad in itself. It allows banks to extend more credit to businesses and individuals in the market place whose production enhances the economy. It just must be handled with prudent management of risk.

Bringing back Glass-Steagall wouldn’t destroy the economy. It wouldn’t be the end of the world. But it would limit our ability to grow and stifle the economic progress we are capable of once government programs are pulled back and real recovery is able to begin. It comes down to a question of what we want for our country and the world. We can have safety and stability (relatively) without Glass-Steagall 2.0—or we can have safety and stability, accompanied by a limited economy, with it.