The Shocking True Story of Glass-Steagall and How It Made Me a Believer
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Posted
Wednesday, Aug. 14, 2013, at 11:56 AM
Sen. Elizabeth Warren, D-Mass., welcomes Securities and Exchange Commission Chairman Mary Jo White.
Photo by Chip Somodevilla/Getty Images
Photo by Chip Somodevilla/Getty Images
The furiosity and insistence with which proponents of stricter
financial regulation have denounced the 1990s-era repeal of the
Glass-Steagall ban on letting a single entity house both commercial and
investment banking has long puzzled me.
Combining these operations had nothing in particular to do with the
Great Depression, it had nothing in particular to do with the 2007-2008
banking crisis, and dozens of other things happened in the regulatory
world that you could focus on. But I recently read an old article by
Alex Tabarrok (PDF) in the Quarterly Journal of Austrian Economics that reveals the reason the act was enacted in the first place and that turned me into a believer.
Don't get me wrong. Tabarrok himself is no proponent of Glass-Steagall,
and the article is no case for the law. It follows the somewhat tedious
formula of a lot of "public choice" (i.e., "political economy" but when
done by a political conservative) scholarship of acting as if the
exposé that the politicians and regulators behind some given move
weren't pure as the snow itself constitutes a policy argument. But it's
extremely informative and sheds some much-needed light on where this
rule came from, and how you might imagine getting the banking sector
back under wraps.
The basic story is that the Depression led to a lot of public outrage
about the financial system and the outrage was—as outrage tends to be—a
little bit inchoate and not really focused on the fine-grained details
of public policy. Meanwhile, the Rockefeller family and the Morgan
family had some long-standing business conflicts between their
respective empires. And the Glass-Steagall bill was essentially an
effort by the Rockefellers to channel that inchoate public outrage in a
direction that would harm the Morgans:
More than anyone else, Winthrop Aldrich, representative of the Rockefeller banking interests, was responsible for the separation of commercial and investment banking. With the help of other well-connected anti-Morgan bankers like W. Averell Harriman, Aldrich drove the separation of commercial and investment banking through Congress. Although separation raised the costs of banking to the Rockefeller group, separation hurt the House of Morgan disproportionately and gave the Rockefeller group a decisive advantage in their battle with the Morgans.
Tabarrok notes that when this kind of regulatory strategy is pursued
in a given industry, "the industry as a whole will shrink" even while
one firm gains an advantage over its rivals. And here we have actually
an answer to a question that's troubled me for years: How, given
political realities, can the financial sector ever be brought to heel?
After all, it's not going to stop being the case that lobbyists have a
lot of influence over the legislative process or that the costs of bank
regulation are concentrated and the benefits are diffuse. Under the
circumstances, I've found it difficult to tell a plausible story in
which there's sustained effective bank supervision and some reversal of
finance-friendly industrial policy and the hypertrophy of the financial
services sector.
This story about Glass-Steagall and cost-raising strategy gives me
hope. It shows a way that smart and savvy would-be regulators can find
ways to undermine sector-level political solidarity. Not just in ways
that favor one firm against another (which would be pointless) but even
in ways that shrink the sector as a whole.end quote from:
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