Last week, Mervyn King, Britain's equivalent of Federal Reserve
chairman, delivered a scathing speech calling for radical reform of the
British financial system. Among his recommendations: break up the "too
big to fail" banks and separate risk-taking investment banks from
meat-and-potatoes commercial banking.
That's hardly Ben
Bernanke's view. In fact, the only financial player in Washington who
publicly agrees with King is Paul Volcker, the former Fed chairman advising President Barack Obama, though Volcker's successor at the Fed, Alan Greenspan,
recently startled observers by waxing favorably about busting up the
banks. Reports, however, indicate that Volcker is mostly ignored within
the Obama administration, where financial policy is largely guided by
Treasury Secretary Tim Geithner and senior economic adviser Larry Summers, both highly sympathetic to Wall Street.
The Volcker position would resurrect the Depression-era Glass-Steagall
Act prohibiting commercial banks from engaging in brokerage activities.
Why the ban? Because losses from the risky securities business could be
covered by drawing from federally insured deposits. This gives
high-rolling bankers incentive to behave recklessly, confident the feds
would save them if they crapped out.
Glass-Steagall
evaporated in the 1990s deregulation mania. The financial industry and
its Washington friends – especially Texas Sen. Phil Gramm and then-Treasury Secretary Larry Summers (yes, that Larry
Summers) – argued that for America to remain globally competitive, the
Glass-Steagall firewall had to come down. In fact, this newspaper
agreed at the time.
But not everyone was pleased with its demise. Sen. Byron Dorgan,
the North Dakota Democrat, prophesied: "I think we will look back in 10
years' time and say we should not have done this but we did because we
forgot the lessons of the past." Lo, here we are a decade later,
clawing our way out of the worst economic crisis since the Depression.
It's too simplistic to blame Glass-Steagall's repeal alone for the
crisis. And it isn't clear that bringing it back would help decisively
(though note that China keeps investment banks separate from commercial
banks and isn't doing badly on the economic front). Still, given how
wrong Summers, Geithner other high priests of 1990s deregulation were
to trust Wall Street's self-control, an experienced gray eminence like
Volcker deserves a wider hearing.
Wall Street may be
rebounding, but Main Street is still in a world of hurt. It's not
mindless populism to expect that high-flying bankers will find their
wings clipped lest they soar too close to the sun – and take us all
down with them. As the authoritative Financial Times columnist
Martin Wolf put it, "Open-ended insurance of weakly regulated
institutions that take complex gambles is intolerable."
It really is that simple. Whether we get there through a reborn
Glass-Steagall or some other means, we have to get there. The era of
believing that what's good for Wall Street is automatically good for
America is over."Anyone who proposed giving government guarantees to
retail depositors and other creditors, and then suggested that such
funding could be used to finance highly risky and speculative
activities, would be thought rather unworldly. But that is where we now
are.""The banks are there to serve the public, and that is what they
should concentrate on. These other activities create conflicts of
interest.""If they're too big to fail, they're too big. In 1911 we
broke up Standard Oil – so what happened? The individual parts became
more valuable than the whole. Maybe that's what we need to do."