Question

What was the Glass-Steagall Act? Explain why repealing it in 1999 contributed to the global financial crisis.

Answer 1

The Glass-Steagall Act is a statute of 1933 distinguishing investment banking from retail banking. The initial stock sales were coordinated by investment banks, called an initial public offering. Mergers and acquisitions were encouraged. Many of them were managing their own hedge funds. Deposits were taken from retail banks, accounts were checked, and loans were made. In separating the two, retail banks are prohibited to use funds from depositors for risky investments. Just 10% of their profits could be generated from stock sales. They were able to support government bonds. The act established the Federal Deposit Insurance Corporation, most essential to depositors.

The big bank supporters and commentators who ought to know better reiterate the lie that Glass-Steagall's abrogation had nothing to do with the 2008 crisis. Indeed, the financial crisis may not have happened at all but for the abolition of the Glass-Steagall law in 1999, which separated commercial and investment banking for seven decades. If there is any hope of avoiding another meltdown, it is critical to understand why the abolition of Glass-Steagall helped bring about the crisis. Another bigger catastrophe is just a matter of time without a return to something like Glass-Steagall.

In 1999, at the behest of big banks, Democrats led by President Bill Clinton and Republicans led by Sen. Phil Gramm joined forces to dismantle Glass-Steagall. An almost identical replay of the Roaring Twenties was what happened over the next eight years. Once again, banks created fraudulent loans and sold them again in the form of securities to their customers. In 2007, the bubble peaked and burst in 2008. The hard-earned 1933 experience was lost in 1999's pride. The attacks on this clear-as - a-bell narrative by the bank supporters deserve a hearing to show how flimsy they are. One bank supporter says you can't blame banks for fraudulent credit originations because unscrupulous mortgage brokers were doing that. That's ridiculous. The brokers would not have been able to finance the loans in the first place if their production had not been purchased by the banks.

The 1933 Glass-Steagall Act separated commercial and investment banking activities. Before being implemented, J.P. Morgan & Co. has been active in commercial banking and securities. This eventually split into Morgan Stanley investment bank and JPMorgan commercial bank. Following decades of erosion, the Gramm-Leach-Bliley Act repealed two sections of the Act in 1999 under the presidency of then President Clinton. Under one structure, it allowed universal banking.