Glass-Steagall Fight Heats Up As Policy Committee Heads to Washington

http://larouchepac.com/node/27366

Glass-Steagall Fight Heats Up As Policy Committee Heads to Washington

July 16, 2013 • 9:45AM

Already on Friday, one day after the introduction of the second Glass-Steagall bill into the U.S. Senate, the Capitol Hill rag "Politico" covered the bill and included an attempted rebuttal by a banker, who claimed Glass-Steagall would not have prevented the 2007-08 collapse because the first institutions to collapse were "investment banks" rather than commercial banks.

Politico followed immediately with a Monday morning, July 15 breakfast interview with Fed Board member Daniel Tarullo, who repeated that same tired lie, which had earlier been mouthed by both Bernanke and Obama in unprovoked attacks on Glass-Steagall.

But that same day, Politico was forced to publish a refutation by Glass-Steagall proponent and FDIC Vice-Chairman Tom Hoenig, who wrote, "Those who defend the current banking structure insist that the crisis was a product of the investment banks like Bear Stearns and Lehman Brothers and not the largest commercial banks. The facts are, however, whether the institutions were called a commercial bank, investment bank or shadow bank, it was by the time of the crisis a distinction without a difference. Bear Stearns and Lehman were commercial banks in the most important sense.

"Following the passage of Gramm-Leach-Bliley, investment banks, in an effort to compete with commercial banks, began to issue short-term liabilities — such as repos — to fund longer-term assets, just as commercial banks use demand deposits. With the bailout of Bear Stearns the government confirmed the market's perception that these so-called shadow banks were no different than commercial banks, and the moral hazard problem thus worsened. Separating broker-dealer activities from the federal safety net and the subsidy that comes with it would subject these firms to more of the market's discipline."

Another Glass-Steagall proponent, MIT professor and former IMF chief economist Simon Johnson, refuted the same lie in Huffington Post on the same day, July 15. He wrote that those who say that only investment banks caused the crisis have overlooked the role of Citigroup, which was instrumental in Glass-Steagall's repeal, and used that repeal to become the largest bank in the U.S., with assets equal to 15% of U.S. GDP, and perhaps the largest bank in the world at that time. Citigroup required Federal bailouts numerous times over the subsequent period, as EIR documented fully at the time.

But it must be emphasized that neither of these Glass-Steagall proponents, as well-intentioned as they are, yet understands the real significance and true dimensions of Glass-Steagall.