Imagine you're a golf fanatic and you're having a frustrating day on the course. (If you've ever played golf you know what I'm talking about.) Then, as you're scratching your head wondering what you need to do to get your swing working again, Tiger Woods strolls over and gives you free golf lessons...what would you do? Would you ignore him or would you listen intently and immediately adjust your swing? Of course you'd do anything and everything he recommends. But today Congress is ignoring advice from the most seasoned and respected bankers and economists about how to fix the banking system - which is like ignoring golf advice from Tiger Woods.
In my February post titled "Why banks need to become like utility companies" I wrote that the repeal of the Glass-Stegall Act in 1999 was a huge mistake that led to the recent collapse of the banking industry and economy. This deregulation allowed traditional consumer and commercial banks to merge with risky investment banks - and the walls of security we built after the Great Depression disappeared.
Obama's top economic adviser, Paul Volcker, has been pleading with lawmakers to separate traditional banks from investment banks, according to a N.Y. Times article. Volcker is considered a genius and a legend in the economic world. As chairman of the Federal Reserve, he single-handedly crushed runaway inflation in the early 80's which was choking our economy. Obama appointed Volcker to head the president's Economic Recovery Advisory Board. But appointing a legend and taking advice from a legend are two different things. Neither the administration nor Congress are listening to him.
John Reed, former chairman of Citigroup, admitted in a Bloomberg interview that lawmakers were wrong to repeal the Glass-Steagall Act in 1999. He also "apologized for his role in building a company that has taken $45 billion in direct U.S. aid." In an October 21st letter to TheNew York Times he wrote that "some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense." This is a guy who knows - he's been a leading banker before and after Glass-Steagall. Wall St. bankers aren't known for humility so when one finally apologizes and tells us how to fix the problem, we should listen! He's like a burglar telling you how to protect your house from a break-in.
Even Joseph Stiglitz, a Nobel laureate in economics at Columbia University and former Clinton administration official agrees with Volcker. He simply states “we would have a cleaner, safer banking system” if we separate consumer banking from investment banking.
Separating the two types of banks would also simplify regulation and make it more effective. Keeping banks combined requires a raft of regulations to prevent another meltdown, along with government agency staff to monitor this - all to keep the commercial banks safe from the antics of investment bankers. By their very nature, investment bankers will always look for ways to make ridiculous sums of money - that's what they're paid to do. But higher returns always require higher risk, and when high-risk investment banks blow up, which they do from time to time, we can't let them crush the bread-and-butter banking that fuels our local economy - small business loans, auto loans, mortgages, insurance, etc. Let the investment banks fail without government bailouts (paid for by taxpayers) and keep the commercial banks safe, backing it up with FDIC insurance. It would be far safer to just separate them rather than try to regulate them through myriad rules, regulations and enforcement staff.
It's time the Obama administration and Congress wake up to a simple reality. Glass-Steagall, enacted in 1936 kept our banking system running for 72 years - through good times and bad. Listen to what the experts are saying.