Should the Glass-Steagall Act be brought back?

Just about three years ago, the United States entered into a financial crisis so large, it is said to have been one of the worst since the Great Depression. There were many factors that influenced the recession of 2008, among them were the housing bubble, easy credit conditions, and incorrect pricing risk.

Aside from all this, poor regulation was also stated to be one of the major causes of the twisted manipulation of finances among the major players of Wallstreet. However, before the freedom that bankers had, there was a law that was put into place to act as a firewall from manipulation between commercial and investment banking.

This law is popularly known as the Glass-Steagall Act, which was made in 1933, but was repealed in 1999. Today, more than 10 years after its repeal, we wonder whether the act was wrongly revoked, and should a movement be made to return it to its rightful place in law? More importantly, should this be considered to be the number one agenda of Occupy Wallstreet?

Overview of the Glass-Steagall Act

The history of the Glass-Steagall act goes as far back as the Great Depression in the 1920’s. It was then when Congress began to examine the mixing of commercial and investment banking that led to conflicts of interest and fraud in some banking institutions’ securities activities. In order to develop a barrier between commercial and investment banking, and in order to prevent fraud and manipulation, the Glass-Steagall Act, also known as the Banking Act of 1933, was formed.

Aside from creating a barrier between investment and commercial barrier, this law also created the groundwork for legislation that allowed the Federal Reserve to allow banks into securities in a limited manner. The Act was propagated by Senator Carter Glass, a former Treasury secretary and founder of the U.S Federal Reserve System along with Henry Bascom Steagall, who was a House of Representatives member and chairman of the House Banking and Currency Committee.

Effects of the Glass- Steagall Act

The act was made as a reaction to one of the worst financial crises at the time. During the enactment of the law, banks were given one year to decide whether they would specialize in investment or commercial banking only. Only 10% of commercial banks’ income would be coming from securities, except for the underwriting of government issued bonds. At this time, financial giants such as JP Morgan and Company, which was largely part of the problem, were targeted and forced to cut their services, thus greatly diminishing a portion of their income.

Because of this barrier, the Glass-Steagall Act effectively prevented the banks from using depositor’s money in case of a failed underwriting job. Despite the safety and regulatory purpose of the act, many people in the financial community considered it to be too harsh. It was reported that even Glass himself moved to repeal the act shortly after it was passed, saying that it was merely an overreaction to the crisis.

Repeal of the Glass-Steagall Act and It’s Effects

The banking industry has been seeking the repeal of the act since the 1980’s. It was during 1999 when the Gramm-Leach-Bliley Act was made that repealed the Glass-Steagall Act. During this time, the repeal of the act was considered to be a way to help American banks grow larger and better, and thus able to compete against other banks worldwide.

It was only 10 years later when the repeal of the Act showed its effects. It is said that the repeal of the Glass-Steagall Act contributed greatly to the global financial crisis and the recession of 2008. Because the barrier between commercial and investment banking no longer existed, this allowed non-transparent financial manipulation that allowed investment bankers to amass huge fortunes.

It is said that large banks born out of the repeal of the act such as Citigroup, and insurance companies like American International Group, would not have run into trouble if the law had remained in place.

Reasons for Reinstatement

Despite what most financial critics would consider to be a “harsh” law, the Glass-Steagall act served its purpose for many years. Under the Act, regulators protected bank depositors from speculation of the stock market and other investment banking activities.

It also prevented manipulation of finances among the major players of Wallstreet who only managed to earn their dollars not through trading, but through “financialization”. Putting back the act to effect would help diminish fraudulent activity and will give the regulations we seriously need.

By putting this movement on top of Occupy Wallstreet’s agenda, this could bring focus to one of the most effective things that can be done in order to stop financial manipulation, and bring regulations back at bay.

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