The “New” Glass-Steagall

A week or so ago somebody brought to our attention a proposal by Senator Elizabeth Warren.  No, it had nothing to do with the oddity of a culture that insists on “gender inclusive” terminology for pretty much everything that doesn’t matter, but says nothing about calling relatively young ladies “Old Men” or “Tribal Elder,” which is what “senator” means in Latin.

“Senator” comes from “senex,” the same root as “senile.”  (Note to women: you can’t be senile.  You have a special word all your own: anile.  You come down with anility, not senility, lucky you.  Next time somebody says you’re senile, let ’em have it.)

Anyway, what Anilitrix . . . I mean, Senator Warren is proposing is a “new” Glass-Steagall.  Except that it’s not really a new Glass-Steagall" or even Glass-Steagall 2.0 as advertized.  The original second Glass-Steagall Act (there were two) mandated separation of function in banking according to what type of bank it was to avoid vertical integration or monopoly, and prohibited banks from crossing state lines to avoid horizontal integration or monopoly.

All Senator Warren's proposal does, while well-intentioned, is tighten regulations governing the functioning of the horizontal and vertical integration that has resulted from the repeal of Glass-Steagall, leaving the underlying problem in place.  This means that "how bad" or even if something is bad remains a matter of opinion, that is, a matter of degree.

Under Glass-Steagall, whether or not a transaction or relationship between institutions was "bad" was irrelevant.  It was the transaction itself, a matter of fact, not opinion, that determined if the law was violated, a matter of “kind,” not mere degree.

All financial institutions must be separated again on the principles of good internal control, e.g., banks that create money (commercial banks) must be separated from banks that move money (investment banks), insurance companies must be separated from both.  We would recommend going even a step further.  Commercial banks should be prohibited from offering personal banking services, e.g., checking accounts, credit cards, mortgages, etc.

The only reason commercial banks in the U.S. offered these and other services in addition to their commercial banking services is that small towns could rarely support more than one financial institution, so one had to handle everything, regardless how incompatible.  With modern communications and internet banking, this is no longer necessary.

The proper separation of function and the return to financial institution specialization is only a step in the right direction, however.  We also need to see a complete overhaul of both the tax system and the money creation system as detailed in CESJ’s Capital Homesteading proposal.

We don’t need another batch of regulations that will be ignored by those with enough power to do so.  We need genuine systemic reform, starting with how money is created and how government obtains funding.

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