Essential Pittsburgh
3:40 pm
Tue July 23, 2013

A History of Reigning in the Banks

Could reinstating a Great Depression era financial regulation help save the financial sector?
Could reinstating a Great Depression era financial regulation help save the financial sector?
Credit US House of Representatives / Wikipedia

In an era when big banks are mired in complex and often risky investment schemes, could the reinstatement of a Great Depression era financial law help curb the financial sector’s speculative trading? That’s the discussion being had in congress, as Senators John McCain and Elizabeth Warren push to reinstate the Glass-Steagall Act, a piece of depression era legislation that creates a separation between commercial banking and investment banking. From the perspective of Michael Haley, a professor and H.J. Heinz Endowed Chair of business management at Point Park University, reinstating the act could at least help to simplify the complex banking system currently in place.

According to Haley, the Glass Steagall Act was originally passed by congress as a way to prevent the sort of runs on banks that occurred during the Great Depression. Because banks were engaged in speculative activities, opening a savings account was a risky move. However, this turned around after the Glass-Steagall act was passed in 1933, which allowed the federal government to establish the Federal Deposit Insurance Corporation and restore faith in banking. “By separating banking from speculative activities, the FDIC could emerge as an anchor to the system,” Haley says.

But that all changed in 1999 when, under pressure from banking groups that sought to merge with insurance companies and other investment groups, the law was repealed. Haley says that this development, along with easy lending from the Federal Reserve and increasingly complex speculative practices by investment banks, played a substantial role in 2008’s economic meltdown. More importantly, many of the same problems in the system remain even after the meltdown and subsequent bailout. Citing the disproportionate power that the nation’s top six banks hold over the financial sector, Haley claims that the current system has proven to be more interested in profits than offering loans to consumers, saying that “the banks aren’t lending, but they are speculating and making huge profits.”