On Glass-Steagall and regulating the banks

[Neu Leonstein]

The election of Donald Trump, and the UK's post-Brexit threats of turning the country into an offshore financial centre, have prompted some to wonder whether there could be a push to change global bank rules.

For example, Elizabeth Warren is a long-time proponent breaking up big banks. Many have said that they'd like to bring back Glass-Steagall.

More recently, Gary Cohn from Trump's economic team said that he would also support splitting up commercial and investment banking. Now, this may be surprising to some, but there's a logic to this. The "pure" investment banks would quite like having competitors who are also only pure investment banks, without the heft that comes with having a commercial bank balance sheet. The wish would be for a simpler world in which investment banks could do their own stuff separately from all the regulations and requirements that come with being a commercial bank. That's probably not what Warren has in mind.

So in short, while on the surface Warren and Cohn are saying the same thing ("break up the megabanks"), the devil is in the detail.

So what would your preference be? What should happen to the existing banks? Who should be doing the things that are currently done by the existing banks?

Bonus question:
If you need inspiration for a specific example, here is a story about a guy (kinda) losing $200 million. Outrageous, right? How can he be allowed to gamble with so much money? And now, here is the same story from the other side, where Mexico is trying to protect its taxpayers from swings in the oil price. So for a specific example, who should be helping the Mexican government with this risk they have?

[Greed and Death]

I have never understood the obsession some segments of society have with brnging back Glass-Steagall. It nothing to do with the crisis mortgages were sold to investment banks not transferred from commercial banks in the same ownership structure, further a division between investment banking and commercial banking was pretty much limited to the US. Europe by and large never had such a division and were able to capitalize on that division to bolster their own finance sector for 60 odd years.

[Neu Leonstein]

I have never understood the obsession some segments of society have with brnging back Glass-Steagall.

Well, yeah... I think there's an element of it sounding important, of its repeal having involved a lot of lobbying and of the notion that breaking up the banks for punishment, rather than as a way towards more stability. There are a few people who've put together more reasoned arguments, but most people who I've seen argue for it rarely concern itself with what it does in any detail.

[TURTLESHROOM II]

In terms of law, further deregulation should occur.

-but let me tell you about the bailed out banks.

If the GOVERNMENT and the Democrat Congress didn't bail out the banks (and if George Bush didn't sign off on it), they would have COLLAPSED AND GONE UNDER. They would have been paid back IN FULL for what they did. They'd be like Lehman Brothers!
Glass-Steagall doesn't need to return, because the Free Market would have punished the banks in the only way they can actually be punished. That is, by their destruction, and new banks would come to take their place. We have the FDIC for reimbursing those with money in them.

Those banks that were bailed out did not, and do not, deserve to exist. They are thieves at best.

That's why I believe that all banks deemed "too big to fail" in 2007 AD need to be aggressively broken up, Ma Bell style. The government bailed them out and made the mess, so the government needs to undo the mess. The Free Market was denied its chance and right to break up the banks, so the state will have to do that to right the wrong.

[Galloism]

I have never understood the obsession some segments of society have with brnging back Glass-Steagall.

Well, yeah... I think there's an element of it sounding important, of its repeal having involved a lot of lobbying and of the notion that breaking up the banks for punishment, rather than as a way towards more stability. There are a few people who've put together more reasoned arguments, but most people who I've seen argue for it rarely concern itself with what it does in any detail.

Mostly because it's really complicated.

I'm more concerned that the banks are too large. No bank (or any other type of business for that matter) should be so large that its failure will cause a general market contraction.

[Greed and Death]

I have never understood the obsession some segments of society have with brnging back Glass-Steagall.

Well, yeah... I think there's an element of it sounding important, of its repeal having involved a lot of lobbying and of the notion that breaking up the banks for punishment, rather than as a way towards more stability. There are a few people who've put together more reasoned arguments, but most people who I've seen argue for it rarely concern itself with what it does in any detail.

I've had lawyers who should know better claim it regulated mortgages.

[Galloism]

In terms of law, further deregulation should occur.

-but let me tell you about the bailed out banks.

If the GOVERNMENT and the Democrat Congress didn't bail out the banks (and if George Bush didn't sign off on it), they would have COLLAPSED AND GONE UNDER. They would have been paid back IN FULL for what they did. They'd be like Lehman Brothers!
Glass-Steagall doesn't need to return, because the Free Market would have punished the banks in the only way they can actually be punished. That is, by their destruction, and new banks would come to take their place. We have the FDIC for reimbursing those with money in them.

Problem with this: the major market contraction would likely have ballooned into another major market depression.

Those banks that were bailed out did not, and do not, deserve to exist. They are thieves at best.

That's why I believe that all banks deemed "too big to fail" in 2007 AD need to be aggressively broken up, Ma Bell style. The government bailed them out and made the mess, so the government needs to undo the mess. The Free Market was denied its chance and right to break up the banks, so the state will have to do that to right the wrong.

Yeah, that's true. It's not about punishment or correcting the wrong however. It's to prevent it from happening in the future.

[Neu Leonstein]

If the GOVERNMENT and the Democrat Congress didn't bail out the banks (and if George Bush didn't sign off on it), they would have COLLAPSED AND GONE UNDER. They would have been paid back IN FULL for what they did. They'd be like Lehman Brothers!
Glass-Steagall doesn't need to return, because the Free Market would have punished the banks in the only way they can actually be punished. That is, by their destruction, and new banks would come to take their place. We have the FDIC for reimbursing those with money in them.

The FDIC had nothing much to do with it. Or rather, not in the way you seem to think.

[Neu Leonstein]

I'm more concerned that the banks are too large. No bank (or any other type of business for that matter) should be so large that its failure will cause a general market contraction.

But two questions arise:
1) If the banks were smaller, would you support less regulation?
2) How small? The problem isn't just mechanical, it's psychological too. There have been many cases of very small failures setting off cascades because financial systems are always based on trust. You couldn't stop that by making everyone small.

[Internationalist Bastard]

I started to write a whole blurb then realized this didn't say "glass seagull"

[Outer Sparta]

With Glass-Stegall, the economy grew modestly, with no huge gains or losses. Without Glass-Stegall, the economy rallied and grew very quickly one time, but suffered greater recessions other times.

[The Princes of the Universe]

With Glass-Stegall, the economy grew modestly, with no huge gains or losses. Without Glass-Stegall, the economy rallied and grew very quickly one time, but suffered greater recessions other times.

Modest but fairly reliable makes a whole lot more sense than massively unpredictable.

[Major-Tom]

I'll be the first to admit that I don't think I know enough on this topic. I'm naturally distrustful of major banks, but also distrustful of people who blame them for everything, as well as government involvement in the industry, as that leads to crony capitalism.

I think regulating the banking industry is prudent, and making sure they don't make any dumb decisions that lead to, say, a housing crisis is a good idea. But breaking up the large banks like Warren suggests? Don't know where I stand.

[Major-Tom]

With Glass-Stegall, the economy grew modestly, with no huge gains or losses. Without Glass-Stegall, the economy rallied and grew very quickly one time, but suffered greater recessions other times.

Modest but fairly reliable makes a whole lot more sense than massively unpredictable.

Correlation obviously doesn't imply causation. Economic growth is driven by things other than just banks. Not that I disagree entirely with what he is saying.

[Outer Sparta]

With Glass-Stegall, the economy grew modestly, with no huge gains or losses. Without Glass-Stegall, the economy rallied and grew very quickly one time, but suffered greater recessions other times.

Modest but fairly reliable makes a whole lot more sense than massively unpredictable.

Let's say Nation A has steady economic growth of 10% over 50 years. Nation B is prone to huge economic upticks and huge economic declines. In one period (let's say ten years), they might gain 30%, but in another, they might lose 30%. I would go with modest growth instead of an unpredictable economy.

[Sanctissima]

In terms of law, further deregulation should occur.

-but let me tell you about the bailed out banks.

If the GOVERNMENT and the Democrat Congress didn't bail out the banks (and if George Bush didn't sign off on it), they would have COLLAPSED AND GONE UNDER. They would have been paid back IN FULL for what they did. They'd be like Lehman Brothers!
Glass-Steagall doesn't need to return, because the Free Market would have punished the banks in the only way they can actually be punished. That is, by their destruction, and new banks would come to take their place. We have the FDIC for reimbursing those with money in them.

Those banks that were bailed out did not, and do not, deserve to exist. They are thieves at best.

That's why I believe that all banks deemed "too big to fail" in 2007 AD need to be aggressively broken up, Ma Bell style. The government bailed them out and made the mess, so the government needs to undo the mess. The Free Market was denied its chance and right to break up the banks, so the state will have to do that to right the wrong.

Problematically, if the free market had been allowed to take its course and the banks hadn't been bailed out, there could very well have been another Depression. Government does need to intervene after a certain point.

[Galloism]

I'm more concerned that the banks are too large. No bank (or any other type of business for that matter) should be so large that its failure will cause a general market contraction.

But two questions arise:
1) If the banks were smaller, would you support less regulation?

To an extent perhaps. There should still be regulations surrounding truth in lending and such. Dishonest business owners come in all stripes.

2) How small? The problem isn't just mechanical, it's psychological too. There have been many cases of very small failures setting off cascades because financial systems are always based on trust. You couldn't stop that by making everyone small.

Actually, you can - and I don't necessarily means "one building per bank" or "100 employees per bank". The problem comes in when there are so many entities leveraged in with a certain institution that its failure will cause a cascade. If the business is small (relatively), then most of those who hold a stake in it (or are otherwise tied up with it) will also have other similar investments and contracts, and though it hurts the balance sheet, they don't fold up and fail as a result.

Even if there are a few entities that would do so, those should ALSO be required to be "small" in order that there won't be a significant number of businesses who rely on them.

Then, with multiple banks (or, businesses in general, even), someone can step in and fill the breach.

By keeping businesses "small", we limit the damage. Except we don't do that. Here's a few business entities for whom it would be catastrophic to fail now:

Microsoft, Wells Fargo, Bank of America, Wells Fargo, Apple, Wal-Mart, etc.

There's also a number of Chinese businesses with the same issue (although that's not in the US), and the collapse of any one of them will likely cause a cascade in the market. The question is how much of a cascade.

[Outer Sparta]

But two questions arise:
1) If the banks were smaller, would you support less regulation?

To an extent perhaps. There should still be regulations surrounding truth in lending and such. Dishonest business owners come in all stripes.

2) How small? The problem isn't just mechanical, it's psychological too. There have been many cases of very small failures setting off cascades because financial systems are always based on trust. You couldn't stop that by making everyone small.

Actually, you can - and I don't necessarily means "one building per bank" or "100 employees per bank". The problem comes in when there are so many entities leveraged in with a certain institution that its failure will cause a cascade. If the business is small (relatively), then most of those who hold a stake in it (or are otherwise tied up with it) will also have other similar investments and contracts, and though it hurts the balance sheet, they don't fold up and fail as a result.

Even if there are a few entities that would do so, those should ALSO be required to be "small" in order that there won't be a significant number of businesses who rely on them.

Then, with multiple banks (or, businesses in general, even), someone can step in and fill the breach.

By keeping businesses "small", we limit the damage. Except we don't do that. Here's a few business entities for whom it would be catastrophic to fail now:

Microsoft, Wells Fargo, Bank of America, Wells Fargo, Apple, Wal-Mart, etc.

There's also a number of Chinese businesses with the same issue (although that's not in the US), and the collapse of any one of them will likely cause a cascade in the market. The question is how much of a cascade.

What Chinese businesses would they be, and are they state-owned like ICBC or something?

[Great Minarchistan]

The only regulation banks should need to abide is to deposit compulsorily 0.5% of their profit to FDIC - just like Brazilian FGC. Also release the bank competition so the savings' interest rate goes up while the loans' interest rate goes down, therefore reducing the bank spread. Rinse and repeat.

[Neu Leonstein]

Actually, you can - and I don't necessarily means "one building per bank" or "100 employees per bank". The problem comes in when there are so many entities leveraged in with a certain institution that its failure will cause a cascade. If the business is small (relatively), then most of those who hold a stake in it (or are otherwise tied up with it) will also have other similar investments and contracts, and though it hurts the balance sheet, they don't fold up and fail as a result. [...]

I'm not sure that it is the failure of the firm that is the cause though. It was a bit before my time, but in 1995 a big international investment bank called Barings Bank failed. One of its traders had gone rogue and lost so much money that when they discovered it, the bank was done for. There was no financial crisis, because everyone understood that the problem was idiosyncratic.

Financial crises happen when whatever is seen as the problem isn't confined to any particular firm, but is some sort of shock to how everyone understands the world to work. The global financial crisis didn't happen because Bear Stearns failed, or because Lehman Brothers failed. It didn't even happen because BNP ceased redemptions on its securitised asset investment funds (for interest, this is almost creepy look back at it). Those were all just signals of something bigger going on - a realisation that not only was the US housing market starting to turn, but that the techniques everyone had used to protect themselves against it were not actually working.

That shock to beliefs is what caused the financial crisis. Making it possible for big financial institutions to fail in an orderly fashion (whether by drawing up plans or by breaking them up into the little ones) is helpful mechanically, because it can take the panic out of the moment when everyone knows what will happen next. But it doesn't really affect the underlying shock that caused the problem in the first place. You can have that shock even if you've got thousands of little banks. And if that's the system you're going for, the question is whether some things that big banks can currently do because they're big (like those hedges for Mexico) just shouldn't be done.

[Valaran]

Glass-Stegall is a massive red-herring and political bugbear. It isn't the cause of financial industry's issues.


I'd look closer into the ideas of internal ring-fencing, if people are so worked up about retail and investment under the same firm.

[Saiwania]

Glass-Steagall should be brought back because it is obvious to me anyways, that commercial banks are incapable of also being investment banks responsibly. A bank should be one or the other, but not both.

Banking in general, is the business of lending money and banks have the obligation not to gamble or misuse their depositors' money on stupid crap like golden parachutes, mergers, acquisitions, or the buying up of rotten assets that they can't sustain over the long run.

[The of Japan]

Glass-Stegall has nothing to do with subprime mortgage crisis nor its removal had any effect. It is unnecessary regulation that gave an (potentially slight) advantage to European and other banks as America was quite unique in passing Glass-Stegall (or something like it).

[The of Japan]

Glass-Steagall should be brought back because it is obvious to me anyways, that commercial banks are incapable of also being investment banks responsibly. A bank should be one or the other, but not both.

Banking in general, is the business of lending money and banks have the obligation not to gamble or misuse their depositors' money on stupid crap like golden parachutes, mergers, acquisitions, or the buying up of rotten assets that they can't sustain over the long run.

Banks wouldn't do that if Government won't provide hundreds of billions of taxpayer dollars to bail them out if they screw up (1985, 1990s, 2007-09). The GFC was caused when US didn't bail out Lehman Brothers (which most expected them to bail them out), causing a credit freeze.

[Saiwania]

Banks wouldn't do that if Government won't provide hundreds of billions of taxpayer dollars to bail them out if they screw up (1985, 1990s, 2007-09). The GFC was caused when US didn't bail out Lehman Brothers (which most expected them to bail them out), causing a credit freeze.

I really have to scoff at the notion that every time a bank screws up, that the government should have to bail them out when any other business in the private sector isn't entitled to such help and has to go bankrupt or bear the full cost and long process of digging themselves out of the hole that they dug for themselves if they can survive. At least that way, most companies can learn from past mistakes.

The problem I see with combining commercial and investment banks is that the conflict of interest between the way the two types are run is too great. More often than not, an investment bank culture will prevail if such a bank has the backing of a commercial bank balance sheet. This is because there is a demand for high returns that could be obtained only through high leverage and big risk-taking.

Such an arrangement would clearly be exposing depositors' money to more risk than is necessary. If an investment bank wants to merge with another of the same type, I think I'd approve, same with a commercial bank. But an investment and commercial bank being directly combined should never happen. I don't want the investment side to play or "gamble" with the commercial side's money.

An investor accepts risk (the possibility of losing money while investing) while a depositor just wants their money to be reasonably safe.