A Proven Way to Curb the Big Banks
From Risky Gambles with Our Money

Here is how the reckless power of the banks was curbed during the Great Depression. It provides a model that we can use today to reform the financial system of Wall Street. .

After only a few days in office, President Franklin D. Roosevelt announced a four-day “bank holiday” to begin March 6 1933, promising the public that Congress would work out a plan to reform the banking industry.

By mid-June, Congress had passed the landmark Banking Act of 1933 (also known as the Glass-Steagall Act) that prohibited commercial banks from engaging in the investment business. The Act prevented the banks from using their depositors’ money for private investments in securities, the stock market and other financial ventures.

The Act was an emergency response to the failure of thousands of banks during the Great Depression. The new law also placed tighter restrictions on national banks, and created the Federal Deposit Insurance Corporation (FDIC), that insures depositors with a pool of money in case of bank losses or failures.

The Act remained on the books for more than a half a century, and the banks complied with the law. But in November 1999, the banks, with the sponsorship of congressional Republicans, succeeded in having the law repealed after a twenty-year lobbying campaign. President Clinton signed the repeal. The major banks were now free to use depositors’ money for high-risk, high profit investments, many of which turned out badly.

Most economists agree that the repeal of Glass-Steagall contributed to the global financial crisis of 2008-2009. The year before the repeal, sub-prime loans were just five percent of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30 percent.

Labor Should Fight to Restore Glass-Steagall

Speeches and chanting slogans in front of the banks’ headquarters may be an outlet for our anger, but they are not going to shame them to change their ways of doing business. While AFL-CIO President Trumka continues his verbal attacks on Wall Street, Congress and the conservative economists in the Obama administration are simply not listening. It should be fairly obvious that there is nothing further that Trumka can say that will change the situation. It’s a case where action will have to speak louder than words.

It’s time we began to challenge the banks at the core of their power: their use of depositors’ money for high-risk, high profit investments, that can lead to a future financial crisis. Fortunately, we have a new opportunity to reform the banks the way the New Dealers did in 1933.

In mid-December of 2009, Republican Senator John McCain of Arizona and Democratic Senator Maria Cantwell of Washington State, jointly proposed re-enacting the Glass-Steagall Act to re-impose the separation of commercial and investment banking that had been in effect from the original Act in 1933 to the time of its repeal in 1999. Similar legislation has also been introduced in the House of Representatives.

Paul Volker, the former Federal Reserve chairman and a close adviser to President Obama, wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. President Obama has proposed bank regulations similar to some parts of Glass-Steagall in limiting several of the banks’ trading and investing capabilities.

In mainland Europe, notably in France, Germany and Italy, an increasing number of think-tanks are calling for the adoption of stricter bank regulations through new national and EU legislation based on the Glass-Steagall Act. In the U.K., the debate about the need for a “new” Glass-Steagall has raged in the wake of the 2008 bank bailout. China is also among the nations that maintain a separation between commercial banking and the securities industries.

No matter how many verbal attacks we launch against the banks, they are not going to change their behavior. Our best course of action to avoid future financial crises is to re-enact the provisions of Glass-Steagall.

Does anyone have a better proposal?—Harry Kelber

LaborTalk (56) will be posted here on Friday, April 16, 2010 and on our two web sites: www.laboreducator.org and www.laborsvoiceforchange.org.