Daniel Bennet believes that the cause of our economic woes “was the institutions which had never had any regulations to begin with” and the repeal of the Glass-Steagall Act (3-25). He couldn’t be more wrong.
Banking is heavily regulated. There’s the Federal Reserve (which controls interest rates and the money supply), the SEC (which enforces regulations), the Glass-Steagall Acts (1932-33), Federal Deposit Insurance (FDIC), capital requirements, reserve requirements, financial reporting and disclosure requirements, credit rating requirements, large exposure restrictions, related party restrictions, affiliation restrictions and payment system requirements. Money is the most regulated thing in America.
Mr. Bennet cited the repeal of the Glass-Steagall as a cause of the crises. But remember, only part of Glass-Steagall was repealed in 1999, the part barring investment banks from combining with regular banks. It kept deposit insurance (FDIC) backed by the government. Thus, the risk was socialized (because FDIC would bail out bad banks) while profit was privatized (now being able to combine, get big and diversify). This is corporate socialism.
Further, the institutions that failed, Bear Stearns and Lehman Brothers, were investment banks that didn’t combine with commercial banks. They were bought by banks that had combined under deregulation to become stronger: B of A and JPMorganChase. So without the repeal, the crises might be worse.
The root problem is that previous government bailouts, like the S & L crises of the 1980’s, were always looming in the background to encourage risky behavior. It doesn’t make sense to forbid banks to diversify their product line to limit risk, while at the same time guaranteeing their deposits–which increases risk. So the repeal of Glass-Steagall didn’t go far enough.
Liberals who support regulation often fall into this trap. They see a problem, and–failing to understand that we don’t have unfettered capitalism and that there are pages and pages of regulations already—they mistakenly demand more regulations, rather than repealing the excessive ones we already have.
The American economy is not a free market. It might have been in 1880, but since FDR and the New Deal 1930’s, we haven’t been close. The key is to deregulate by abolishing the Federal Reserve and ending subsidized insurance to the banking industry, and repealing the rest of Glass-Steagall.
Without the FDIC, banks would be tuned into any potential panics and runs and reel in their loans accordingly when public anxiety rose, like a kind of shock absorber. Subsidies and regulations disable this natural self-regulation of the market.
Jeff E. Jared, Kirkland
