First, I know that the name of Elizabeth Warren, the U.S. Senator from Massachusetts, makes Wall Street’s collective blood boil. In fact, blood pressure levels must be rising this week as Warren makes the rounds again in part to promote the paperback version of her book “A Fighting Chance.”
In interviews on TV and radio, Warren is quite skillful in arguing for a beat cop to police Wall Street, the success of the Consumer Financial Protection Bureau, and the real threat of institutions that are getting too big to fail even after the Great Recession. She also masterfully fends off questions about a possible run for the presidency and who will replace U.S. Sen. Harry Reid, the Democrat from Nevada who is moving out of his post as Minority Leader in the Senate.
Frequently her rants against Wall Street lack nuance even though she is quite capable of drilling down to the nitty gritty details. She rarely acknowledges the good that the financial markets do for the global economy, preferring to share stories about some of the more arrogant figures in the industry. She does back up her verbiage with action and has taken on major firms and figures in the industry. She is not likely to be asked to JPMorgan’s or Citi’s winter holiday parties and that suits her just fine because she is on a populist crusade.
However, her rhetoric does include an interesting call for the return of the Glass-Steagall act. In fact, Warren has said that she and U.S. Senator John McCain from Arizona are going to introduce a bill to bring back Glass-Steagall (maybe they’ll call it McCain-Warren).
As you may recall, the Glass-Steagall Act came about during the Great Depression when Franklin D. Roosevelt and the U.S. Congress were trying to sort out how to prevent another economic depression or at least curb the severity of inevitable future downturns. Glass-Steagall created a wall between commercial banking and investment banking with the intention of keeping banks that cater to Main Street safe from the huge risks of investment banking.
Enacted in 1933, it lasted until 1999 when all the great minds of the time declared that it was irrelevant and was hampering modern finance. Its repeal even had the blessings of the Clinton administration.
Less than a decade after its repeal, though, the nation veered very close to another, nasty depression in large part because there was no Great Wall separating Main Street from Wall Street. Warren and McCain want the financial services industry to return to the clear separation between “boring banking” and the risky investment banking.
My guess is that the new Glass-Steagall proposal will reflect some of the changes even boring banking has experienced in the past 82 years. My hope is that if a bill is introduced it will spark a renewed interest in not only the need for a Great New Wall but also some honesty about firms that are getting too big to fail again. Should some of these behemoths be broken up to provide more security for the industry and to stimulate new competition? The Congress has never really dealt with this question and it’s probably because Wall Street lobbyists have effectively prevented that issue from going national.
I’m fairly certain that such a proposal would also cause people to argue that the Volcker Rule is the new Glass-Steagall and has had the same effect. To some extent, it is causing firms to step away from proprietary trading and to undergo an enterprise-wide review of risk. Yet the Volcker Rule is constantly under attack and could one day be gone if a Republican wins the White House next year.
Warren and McCain just might get their bill off the ground and, if so, it would spur a much-needed, profound debate about Wall Street’s inherent flaws. We just might get a glimpse at what could cause the next financial crisis.
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