Treasury Official: ‘Going Back To Glass-Steagall Would Be Like Going Back To The Walkman’

Sens. Maria Cantwell (D-WA) and John McCain (R-AZ)

Sens. Maria Cantwell (D-WA) and John McCain (R-AZ)

Today, Sens. John McCain (R-AZ) and Maria Cantwell (D-WA) introduced legislation reinstating the Glass-Steagall Act, the Depression-era law separating investment and deposit banking that was repealed by 1999’s Gramm-Leach-Bliley Act.

The law would give financial conglomerates like JP Morgan Chase and Bank of America one year to decide if they want to be investment banks or depository institutions, and formally bar investment banks from engaging in insurance activities. Goldman Sachs would officially lose its status as a bank holding company and Citigroup would be forced to ditch its non-bank affiliates.

“Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes,” Cantwell said. “The first step is this bill.” McCain — whose inclusion in this effort is interesting given his closeness to Phil Gramm, the man most responsible for removing Glass-Steagall — added that “if big Wall Street institutions want to take part in risky transactions, fine. But we should not allow them to do so with federally insured deposits.”

McCain and Cantwell’s announcement comes one day after House Majority Leader Steny Hoyer (D-MD) said that House Democrats are considering reinstating Glass-Steagall. But as Sam Stein reported, “the idea hasn’t gotten any attention from the Obama administration, which does not attribute the current crisis to the law’s repeal.” In fact, one Treasury official summed things up this way:

Obama administration officials have dismissed the idea that the financial sector should or can be changed in more fundamental ways than they are now proposing. You can’t turn back the clock, they say, and the new requirements they plan to impose on big banks to hold more capital in reserve, put up $150 billion for a rainy-day rescue fund, and disclose more of their risky trades should be enough to keep the financial sector from imploding again…“I think going back to Glass-Steagall would be like going back to the Walkman,” says one senior Treasury official.

But there are plenty of economists who see things differently, among them the administration’s own Paul Volcker. “People say I’m old-fashioned and banks can no longer be separated from non-bank activity,” Volcker has said. “That argument brought us to where we are today.” The former CEO of Citibank who led the lobbying effort to repeal Glass-Steagall acknowledged a few months ago that “some kind of separation…makes sense.”

Now, the repeal of Glass-Steagall was not entirely responsible for the financial crisis. Its retention wouldn’t have saved Lehman Bros., Bear Stearns, or AIG, for instance. And the resolution authority included in the regulatory reform bill passed by the House last week will go a long way toward ensuring that any financial behemoth can be unwound without damaging the wider economy.

That said, the administration’s refusal to treat a policy separating investment and depository banking seriously on the merits is quite maddening. Sure, it wouldn’t have saved Lehman. Does that mean it’s a bad idea? Joe Stiglitz pointed out that, as a result of Glass-Steagall’s repeal, “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.” Why shouldn’t we honestly consider whether or not that problem can be addressed?