View Poll Results: Would you support some form of the Glass-Steagall Act?

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Thread: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

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    McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices - Michael Hirsh | Newsweek.com

    What do you think about this? The Glass-Steagall Act was instituted during the Great Depression and made it illegal for investment banks and commercial banks to operate as a single entity, effectively divorcing the two. It was repealed in 1999 by the Graham-Leach-Bliley Act.

    In light of the financial calamity last fall, Sens. John McCain and Maria Cantwell are proposing legislation to reinstate Glass-Steagall. They would update it to take into account modern changes that weren't around during the Great Depression, but aside from that it would essentially be the same.

    I think this would be an excellent idea. It would make it less likely that a financial disaster in one sector could spread to the other...or if it did, it would at least mitigate the effect. Personally I would go even further than this, and put a cap on the amount of liabilities that banks are allowed to have in the first place, so we don't run into the situation where they're too big to fail. I don't see any evidence of any economies of scale at that size that makes uber-large banks more efficient than medium-large banks.
    Last edited by Kandahar; 12-16-09 at 03:20 AM.
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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    I don't know if I agree with McCain and Cantwell because I don't know enough about the Glass-Steagall Law. However, I disagree with your point on making a cap on the amount of liabilities that banks are allowed to have. They already have it. They can't loan out more than a certain percentage of what they have in their own bank due to people's accounts. The crisis came up because of low interest rates and, more importantly, programs like Freddie Mac and Fannie Mae that promised houses to EVERYONE. There's a reason people are rich and poor. Some can't get a house right now. Some have to work for it.

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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    Quote Originally Posted by WTPPolitics View Post
    I don't know if I agree with McCain and Cantwell because I don't know enough about the Glass-Steagall Law. However, I disagree with your point on making a cap on the amount of liabilities that banks are allowed to have. They already have it. They can't loan out more than a certain percentage of what they have in their own bank due to people's accounts.
    I was referring to a cap on the OVERALL amount of liabilities they could have. For example, Bank of America has nearly $2 trillion in liabilities (for a point of comparison, the national debt of the United States is $12 trillion), which means that there is no way they could be allowed to go bankrupt without horrendous economic consequences. As a result we get "too big to fail" and bank bailouts.

    In the future, I think this could be prevented if banks were simply prevented from growing this large in the first place. Set a cap on their overall liabilities in the $500 billion range.

    Quote Originally Posted by WTPPolitics
    The crisis came up because of low interest rates and, more importantly, programs like Freddie Mac and Fannie Mae that promised houses to EVERYONE. There's a reason people are rich and poor. Some can't get a house right now. Some have to work for it.
    The housing crisis was the immediate cause of this crisis, yes. But I was thinking more about the consequences to the taxpayers in the form of bailouts. We may never be able to prevent bubbles and recessions, but maybe we can at least prevent the necessity of huge bailouts.
    Last edited by Kandahar; 12-16-09 at 03:28 AM.
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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    Quote Originally Posted by Kandahar View Post
    In the future, I think this could be prevented if banks were simply prevented from growing this large in the first place. Set a cap on their overall liabilities in the $500 billion range.
    Maybe. But if a bank can effectively handle huge amounts of liabilities, then let them? Remember that many small banks with less than a 1/100th of your amount went under as well. It's more of an issue of management rather anything else. Imagine if the 10 largest banks got to the $500 billion mark and then all imploded. We'd still be in the same mess. What would be better, IMO, would be to actually enforce a Basel type of accord. Forcing banks to have sufficient good assets to cover a reasonable percent of obligations along with regulations on just how much derivative type assets they could hold at any one period. If AIG wasn't sitting on the trillion plus CDS which were a ridiculous overallocation of liabilities to assets then it likely wouldn't have gone belly up. I think we'd be better off dealing with the percent of liabilities to asset tiers and fixing just what assets are in what tiers. Basel right now doesn't do well with derivatives.

    For those unfamiliar with Basel type banking accords:
    [ame=http://en.wikipedia.org/wiki/Basel_II_Accord]Basel II Accord - Wikipedia, the free encyclopedia[/ame]
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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    It sounds like a reasonable proposal to me. It's always good to disperse economic power, rather than concentrating it. This would break up the influence of any one bank, right?

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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    Quote Originally Posted by obvious Child View Post
    Maybe. But if a bank can effectively handle huge amounts of liabilities, then let them?
    I'm not at all confident that anyone, least of all the government, is able to tell which banks are capable of handling huge liabilities BEFORE a financial crisis. The collapse of Citigroup's stock price is evidence that investors thought it was fine prior to the downturn.

    Quote Originally Posted by obvious Child
    Remember that many small banks with less than a 1/100th of your amount went under as well.
    True, but their collapse didn't pose the kind of systemic catastrophe that a Citigroup or a Bank of America did. They were allowed to fail (aside from the "bailout" from their normal FDIC insurance). When we have institutions that are too big to fail, they will have the government by the balls every time they get in trouble, which creates a moral hazard and encourages more risky behavior.

    Quote Originally Posted by obvious Child
    It's more of an issue of management rather anything else. Imagine if the 10 largest banks got to the $500 billion mark and then all imploded. We'd still be in the same mess.
    I disagree. While that situation would certainly not be pretty, it would be considerably less devastating than if several of them had $2 trillion in liabilities. Maybe in a worst-case scenario where they all collapsed at the same time, you're right and we'd still need to bail them out. But I think that's a lot less likely to happen when the banks are smaller.

    Quote Originally Posted by obvious Child
    What would be better, IMO, would be to actually enforce a Basel type of accord. Forcing banks to have sufficient good assets to cover a reasonable percent of obligations along with regulations on just how much derivative type assets they could hold at any one period. If AIG wasn't sitting on the trillion plus CDS which were a ridiculous overallocation of liabilities to assets then it likely wouldn't have gone belly up. I think we'd be better off dealing with the percent of liabilities to asset tiers and fixing just what assets are in what tiers. Basel right now doesn't do well with derivatives.

    For those unfamiliar with Basel type banking accords:
    Basel II Accord - Wikipedia, the free encyclopedia
    I like the idea at first glance...but unfortunately I don't know enough to comment. My one concern is that government is not particularly well-equipped to micromanage companies like this and identify which assets are the riskiest. Even the corporate sector doesn't seem to be able to to do it very well; Moody's gave AAA ratings to many derivatives consisting of subprime mortgage-backed securities.
    Last edited by Kandahar; 12-16-09 at 04:27 AM.
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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    Quote Originally Posted by Kandahar View Post
    I'm not at all confident that anyone, least of all the government, is able to tell which banks are capable of handling huge liabilities BEFORE a financial crisis. The collapse of Citigroup's stock price is evidence that investors thought it was fine prior to the downturn.
    So what makes your plan any better now? It wouldn't be too hard to apply ratios rather then numerical limits though.

    True, but their collapse didn't pose the kind of systemic catastrophe that a Citigroup or a Bank of America did. They were allowed to fail (aside from the "bailout" from their normal FDIC insurance). When we have institutions that are too big to fail, they will have the government by the balls every time they get in trouble, which creates a moral hazard and encourages more risky behavior.
    But what happens when a sufficiently large number of them fail? We can end up in a credit crisis either by having a few large banks fail or lots of little ones fail. I'm somewhat against a somewhat arbitrary limit. Especially if a bank can handle it. True, lots of little failings wouldn't result in an AIG effect, but it would be pretty awful.

    I disagree. While that situation would certainly not be pretty, it would be considerably less devastating than if several of them had $2 trillion in liabilities. Maybe in a worst-case scenario where they all collapsed at the same time, you're right and we'd still need to bail them out. But I think that's a lot less likely to happen when the banks are smaller.
    Well, what we saw this time was an overhaul rejection of best conservative banking practices across the entire board. Personally, I think that's one of the biggest factors. When everyone thinks nothing could ever possibly go wrong, all it takes is one to fall and they all come crashing down. I really have no idea how to prevent the collapse of good banking practices. Even strong Basel accords won't stop that. It would mitigate for sure, but not stop.

    I like the idea at first glance...but unfortunately I don't know enough to comment. My one concern is that government is not particularly well-equipped to micromanage companies like this and identify which assets are the riskiest.
    The problem with Basel Accords (one of many) is the lack of real enforcement if you don't adhere and the issue of derivatives. It's pretty clear now that derivatives are much larger liabilities then initially believed. But prior to the introduction of derivatives, the accords did work relatively well without much government micromanaging.

    Even the corporate sector doesn't seem to be able to to do it very well; Moody's gave AAA ratings to many derivatives consisting of subprime mortgage-backed securities.
    Well, the rating agencies are little more then Arthur Anderson these days (RIP). You pay them to rate you with the obvious overhanging idea that you can go elsewhere to get a better rating. It's like a restaurant paying a food critic to rate their food. I really want to know why the rating industry hasn't been fined to hell for their role in the crisis. They knew what they were doing was little more then fraud. A whole package made of good C ratings is not A quality no matter how well you cut it.
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    Re: McCain/Cantwell want to reinstitute/modernize the Glass-Steagall Act

    I think redoing Glass-Steagall is an awesome decision.

    What's hilarious is that McCain is actually to the LEFT of Obama on financial reform. Its also kind of surprising because many Repubs were for removing Glass-Steagall during the Clinton administration, now it seems they have switched priorities on this issue.

    That's the change we can believe in.


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