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flo's avatar

What is "Glass-Steagall Act" in terms that an average 15 year old can understand?

Asked by flo (12974points) May 29th, 2011

1)Linden Larouche and “Glass-Steagall Act”. What do you think of it?
2)Have you seen them on the streets passing out info and asking for contribution for it?
A young person but who looks like an adult was passing by and was given the talk, asked to contribute.

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18 Answers

laureth's avatar

Mr. Laureth, who likes economics, summarizes the Glass-Steagall act thusly: “You can do really risky stuff on Wall Street, OR you can be a bank, but not both at the same time.”

Not sure what LaRouche (a conspiracy theorist, among other things) has to do with it, or why anyone would seek contributions for a law.

flo's avatar

@laureth so they suggest mixing both? By the way they suggest that Dominique Strauss was set up.

laureth's avatar

@flo – No, getting them unmixed was the point of the Glass-Steagall act. Banks did really risky stuff on Wall Street and caused the Great Depression. Lawmakers wanted to make sure that something like the Great Depression would Never Happen Again.

Pulling the Glass-Steagall act apart and putting a muzzle on it is what enabled banks to do really risky stuff on Wall Street again. Reagan took the first shot at it, which is what led to the Savings and Loan meltdown of the late 80s. The last dismantling of Glass-Steagall in ‘99 set the stage for the recent economic catastrophe.

Glass-Steagall is legislation from the United States. I don’t see how it would have anything to do with Dominique Strauss.

flo's avatar

Okay. I don’t know, the thing they were passing out says “he was to secure the final details for the neww Euro Bail-out arrangement” when he was removed from the plane. I don’t know whether to hope that is not true or not.

laureth's avatar

I don’t know, but if it’s about a Euro bailout of any kind, it probably has nothing to do with Glass-Steagall.

WasCy's avatar

Of course, saying that banks “caused the Great Depression” is akin to saying that all those poor people on the northern coast of Japan caused the devastation from the recent earthquake and tsunami there.

Otherwise, @laureth‘s characterization of Glass-Steagall is accurate: the law ensures that “investment banks” and “commercial banks” have separate interests.

ETpro's avatar

@flo Sorry I can’t keep this at a 15 year old’s level, but I must respond to @WasCy and that requires getting down into the details of what went wrong in each of the financial crises.

@WasCy wrote “Of course, saying that banks “caused the Great Depression” is akin to saying that all those poor people on the northern coast of Japan caused the devastation from the recent earthquake and tsunami there” No, it is not at all similar. Poor people on the coast of Japan had nothing to do with causing the earthquake. Wall Street Banks and brokerage houses had a great deal to do with causing the Great Depression. They were playing extremely high-margin Casino Capitalism and couldn’t make good on a market downturn. Wall Street also played a central role in the Greet Recession of 2008–2010 (let’s hope). This time it was banks, investment banks, brokerages and investment insurers colluding and risking $72 trillion per year in incredibly leveraged derivatives. Casino Capitalism all over again. And the American right-wing is desperate to fix blame anywhere but where it belongs, because the Hedge Funds that ran the derivative debt up make SOOOO MUCH MONEY.

If Glass-Steagall had been left in place, the financial crisis of 2008 would not have happened.

WasCy's avatar

According to your logic, @ETpro, which is as flawed as ever. The Fed had absolutely nothing to do with the Depression, I’m sure. Yes, bank management was wrong, but bank failures didn’t “cause” the Depression. The seeds for that had been sown all through the 20s, and bank failures were the last tipping point. Then FDR’s 16-year (and 1 World War) “fix” got us out of it.

Of course, it was the 16-year attempt to “fix things” that made it the Great depression, instead of “just another recession”. It’ll sure be interesting to see how the Bush / Obama ‘fix’ works. And how long.

flo's avatar

Thank you.
It mentions the Euro Bail-out, how the Queen and Obama are bad bad bad (they put Hiltler moustache on Obama)... Also does it make sense these guys on the street were asking for contribution?

laureth's avatar

If they were putting a Hitler moustache on Obama, it makes me think (just in general) that they had to tap-dance on society’s hot buttons in order to get people so riled up that they don’t notice the holes in the actual argument. If their points were backed up with reason, logic, and fact, it could possibly have stood on its own, without resorting to the clichéd histrionics. Just sayin’.

ETpro's avatar

@WasCy No, according to your attack, which is as flawed as usual, I said the Fed had nothing to do with either event. Only I didn’t say that. It’s your straw man. You deal with it. I only took issue with the claim that Wall Street and Banks were as innocent of culpability in the Depression and the Great Recession as the people of Northern Japan were innocent of causing the great earthquake.

@flo Lyndon LaRouche is a certifiable nut case who has run perennially for President and always gets a few hundred votes but reads nothing into such a stunning loss. He is a wild conspiracy theirist and has invented so many wild claims it is laughable.

flo's avatar

Thank you all.

Jaxk's avatar

Just to try and eliminate some of the finger pointing, here is a quick easy way to understand Glass-Steagall. It as passed in 1933 to keep the banks from becoming too big and having too big an impact on the economy.Basically it said that Banks would do banking, Insurance companies would do insuring and Brokerage companies would do brokering (stock trading). The idea was that banks already control so much money that they have a tremendous impact when anyone of them fails. By limiting the businesses they could perform, it limits the impact they could have.

In the 90s, the banks were clamoring to become all service banks. No nefarious purpose behind this but they wanted to compete for IRA savings and investment money instead of only savings accounts. When the repeal of Glass-Steagall was passed in 1999, the Clinton administration was solidly behind it and in fact only 8 senators voted against it. What happened after that is a series of events that definitely contributed to the depth of the recession in 2008 (didn’t cause it but made it worse).

After the repeal in ‘99 the banks were able to begin offering brokerage services such as buying stock or mutual funds in your IRA. Also brokerage firms were able to offer banking services as well. For instance Charles Schwab now offers home loans. They were able to merge with companies like the merger of JP Morgan and Chase Manhattan in 2000. Insurance was available as well which allowed the insurance packages of derivatives. All these things would have been illegal under Glass-Steagall. And all this allowed the banks and brokerage houses to leverage incredible cash assets in the stock market. The more money you have the more credit you can get. It was a burgeoning mountain of cash, credit, and stocks that were all insured by the same people doing the investing. It was the definition of ‘too big to fail’.

Just to add to the picture there was an Asian guy that invented a formula to assess the risk of a basket of properties without really knowing the value of them. In the early 2000s this formula became widely used especially in valuing the derivatives and insuring against defaults. The formula was flawed. And all the while the housing bubble was expanding at a phenomenal rate.

By 2008 the shit hit the fan. Everyone that could buy a house had already bought one. There were no more buyers and the housing market began to crumble. Gas prices robbed middle America of their expendable income and their homes were losing value at an alarming rate. And the sub-prime mortgages that were at thier peak in 2005 were now beginning to adjust, doubling the house payments for many. With no place to get money (since their homes had no equity), they either had to default (prompting the foreclosures) or take it from IRAs or the stock market (which was also crumbling) Defaults escalated, foreclosures escalated, and Property values totally tanked. The banks that had been riding high with all the cash and investments were suddenly hit on all sides. Home loans that seemed solid were defaulting costing them billions. The asset values that they use to borrow and determine the cash reserves tanked forcing them to immediately come up with huge sums of cash, and the investment portfolios were sinking like a stone. The repeal of Glass-Steagall had made them too big to fail and they were failing. The insurance companies that were insuring these huge baskets of properties suddenly realized thier formula was flawed and what should have been a safe bet was a loser. And the insurance companies like AIG went down as well.

Make no mistake, even if Glass Steagall had not been repealed, we still would have had a recession. The housing bubble was ripe and building since the 90s. The gas prices still would have robbed many of their mortgage payments. And the stock market still would have crashed. Accounting rules such as ‘Mark-to-Market’ would still have pushed the banks to come up with lots of cash. The difference is the severity of the recession. And how deep it would have been without the repeal of Glass-Steagall is pure speculation. But it is safe to say it would have been less severe.

ETpro's avatar

@Jaxk That’s an excellent summary. I would just like to add for the record that when Republicans tell it, the repeal of Glass Steagall was all Clinton’s fault. Actually, the act was repealed by the Gramm-Leach-Bliley Act of 1999. Gramm, Leach and Bliley are all Republicans. The legislation was the Republican Party’s signature initiative of 1999.

It passed in the US house May 6, 1999: This bill passed in the Senate by roll call vote. The totals were 54 Ayes, 44 Nays, 2 Present/Not Voting. Jul 20, 1999: This bill passed in the House of Representatives without objection. A record of each representative’s position was not kept. Yes, Bill Clinton signed it, and has defended that move. I think he’s dead wrong. But to claim it was a Democratic initiative is just plain backwards. It was not. And if you tried to put something like Glass-Steagall back in place today, the opposition would be totally from Republicans.

Jaxk's avatar

@ETpro

I don’t disagree that the Republicans pushed this repeal. My numbers on the vote count came from this article. I didn’t think the Huffington Post would have a conservative agenda. So with your Objection I’ve gone back to take a closer look at the vote.

Whereas information can be found to support your number, it is as usual selective and incomplete. The senate passed Gramm-Leach-Biley by a vote of 54 to 44 in May of ‘99. Then the House passed it in June. A conference committee was set to resolve the differences which it did. Once the differences were resolved the went back to the senate and passed by roll-call vote. The totals were 90 Ayes, 8 Nays, 2 Present/Not Voting. The house passed it with a roll-call vote as well. The totals were 362 Ayes, 57 Nays, 15 Present/Not Voting. This is all quite typical and it would seem the vote count for the bill that actually became law would be the one that counts. Not the interim votes. You can find this information here at the very end.

I graciously await your apology.

ETpro's avatar

@Jaxk Actually, the source showed all that. But you have already mentioned the fianl approval vote, so I didn’t repeat that. It was you who left out all the other details (AKS facts) that you sniff at because they came from the wrong source.

Jaxk's avatar

@ETpro

I’m a little late here but my last post was overly sarcastic and I regret that. I’d love to say you might misinterpret it but It was pretty sarcastic. I apologize for that.

ETpro's avatar

@Jaxk Thanks. I value your friendship and didn’t take offense.

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