While making calls for Hillary Clinton recently, I encountered a man who complained that when president Bill Clinton signed the measure repealing the Glass Steagall Act, he created conditions that made the Great Recession of 2007-2008 possible. Because of it, the man refused to support Bill Clinton’s wife.
Ignoring the injustice of blaming Hillary for the sins of her husband, I attempted to explain the Glass-Steagall Act had nothing little to do with banks being too big to fail. Reluctant to receive new information, the man hung up on me.
What he failed to realize was that Dodd-Frank, not the Glass-Steagall, was the legislation designed to address big banking. Dodd-Frank requires banks to hold enough collateral to cover their obligations and give depositors confidence they won’t lose their money. Of course, banks need to invest their assets to make a profit, so, according to Robert Litan, a partner in the law firm Korein Tillery, the bill works against the way banks are intended to operate. What’s more, breaking one big bank into smaller ones is no guarantee the off-shoots won’t engage in nefarious deals. (“America’s Brewing Debt Crisis,” by Robert Litan, Foreign Affairs, Sep/Oct 2016, pg 116.)
Litan insists reinstating Glass-Steagall won’t protect us from bank failure in the future for another reason. “…separating commercial from investment banking would do nothing to stop uninsured depositors, of which there are many, from making a run on commercial banks…” (Ibid pg. 116.) Uninsured depositors are those who have runnable debt — debt not secured by the FDIC. (Click) Common among these forms are money market mutual funds.
Litan’s solutions is that government should insure all accounts, making bank runs a thing of the past. His position gets pushback, however, from those who argue the policy would encourage irresponsible behavior.
Litan doesn’t agree. He points out those savvy enough to know the risk of runnable debt are already depositing their money in large banks, believing, and probably rightly so, that in a crisis, the government will save the big guys. (Ibid pg. 117). Bernie Sanders and his followers may be calling for the breakup of large financial institutions but the trend is in the opposite direction. They are getting larger.
The gentlemen who hung up on me, convinced the 2007-2008 crisis was Bill Clinton’s fault, would have no real reason to sleep better at night if Glass-Steagall were restored next week. He mistakes the danger and therefore the remedy. What can I say? Ignorance is bliss.