Thanks for the buggy ride

America Wants to Know welcomes Sanford “Sandy” Weill to the ranks of Americans who think it was not so hot an idea to repeal the Glass-Steagall Act. (Here’s our 9/20/08 write-up about it, “Train Wrecks.”)

Sandy Weill is the guy responsible for the fabulous glittering mega-merger of Travelers Group Inc. and Citicorp in 1998, a deal which required the assistance of Treasury Secretary Robert Rubin and President Bill Clinton, because somebody had to persuade Congress to throw the Depression-era safeguards of Glass-Steagall overboard and somebody in the Oval Office had to sign that reckless risk into law.

Reckless risk was kind of a theme around the White House that year.

So the dusty, musty law that required the separation of investment banking and commercial banking was repealed, and now, standing amid the wreckage of the international financial system, with ordinary Americans putting their savings into gold and daily reports out of Europe that sound like they’re written by Edgar Allen Poe, Sandy Weill surveys the damage and concludes, “What we should probably do is go and split up investment banking from banking.”

Ya THINK????

The problem with the repeal of Glass-Steagall was both too much government and not enough government. It was too much government because the U.S. government provides deposit insurance to all banks, regardless of whether the bank executives invest in staid, safe, liquid investments or whether they take wild and crazy risks; it was too much government because Uncle Sam provides implicit taxpayer-backing for loans that don’t meet what would otherwise be the banks’ underwriting standards.

If the taxpayers are going to provide deposit insurance and loan guarantees, it is definitely not-enough-government to free the banks from regulatory restrictions on their investments.

Imagine, if you can, what the financial markets might be like without federal deposit insurance and loan guarantees. Some banks would obtain private deposit insurance and would advertise their safety to potential customers. Other banks would offer higher interest without insurance. You would decide the level of risk you were willing to accept. Banks that lost their depositors’ money would go out of business, and the taxpayers would not be writing checks to cover the executives’ bonuses.

If the federal government didn’t guarantee loans, people who wanted to borrow money would have to pay the interest rate charged by someone who was willing to lend it to them.

That would be a free market.

But that’s not going to happen, so we’ll be better off with the protections of Glass-Steagall than without them.

One thing that isn’t helpful is the government’s latest idea of separating financial institutions into those that pose a “systemic risk” and those that don’t, and writing separate regulations for each group.

Why not just hand the big banks the first-born son of the Treasury Secretary and let them raise him as a wolf?

Like anybody else, the banks are going to evaluate the rules and the playing field, and they’re going to do the best they can to win big before time runs out. As long as there are government handouts to be had, the difference between the CEO of Citigroup and a guy who calculates the federal benefits he’d lose if he went out and got a job is one of degree, not of kind.

The best solution is to set competing interests against each other in the marketplace. Government regulators will never be as fast, as smart or as hungry as market participants. They’re the only ones who can keep each other honest.

© 2012


Susan Shelley was a Republican candidate for Congress in California’s 30th District in June and is the author of “How the First Amendment Came to Protect Topless Dancing,” a history of the Bill of Rights. Follow her on Twitter @Susan_Shelley and on Facebook.

Susan Shelley posted at 2012-7-25 Category: Uncategorized