If even Steny Hoyer grasps the folly of Glass-Steagall repeal, maybe it can be undone

"As someone who voted to repeal Glass-Steagall, maybe that was a mistake."

-- House Majority Leader Steny Hoyer (D-MD),
as reported by Bloomberg (see below)

by Ken

We've talked a fair amount here about the Glass-Steagall Act of 1933, which barred commercial banks (i.e., banks that accept customer deposits) and investment banks (i.e., banks that deal in issuing securities) from engaging in each other's activities. It seems pretty clear to most economists that the 1998 repeal of Glass-Steagall, which allowed the same financial holding company to own both kinds of institutions, led rather directly to the free-for-all of financial products being sold which nobody understood and to the general acceptance of wholly unacceptable levels of risk in lending.

Now it appears that even a corporate stooge like House Majority Leader Steny Hoyer (if you look up "corporate stooge" in the dictionary, you find his picture) has gotten the message, as reported today by Bloomberg:

House Discussing Glass-Steagall Revival, Hoyer Says

by James Rowley and Christine Harper

Dec. 15 (Bloomberg) -- The U.S. House is considering reinstituting the Depression-era Glass-Steagall Act, which barred bank holding companies from owning other financial companies, Majority Leader Steny Hoyer said.

A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer told reporters in Washington today. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. by the $46 billion merger of Citicorp and Travelers Group Inc.

“As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” said Hoyer, a Maryland Democrat.

Hoyer made the comments when asked whether Congress and President Barack Obama’s administration could do more to persuade banks to make more business loans and get credit flowing into the economy. Obama met yesterday with the chief executive officers of U.S. banks, urging them to lend more money. . . .

Agreeing with our Steny, rather surprisingly, is former Citibank Chairman John S. Reed, who --

apologized in a Nov. 6 interview for helping engineer the bank’s merger with Travelers and for his role in building a company that took $45 billion in U.S. assistance. Reed also recanted his advocacy of the repeal of Glass-Steagall.

The 1998 merger depended on Congress repealing Glass- Steagall before a five-year deadline that otherwise would have required Travelers to sell its insurance underwriting business.

“We learn from our mistakes,” Reed said in the interview. “When you’re running a company, you do what you think is right for the stockholders,” Reed said. “Right now, I’m looking at this as a citizen.”

Repeal of Glass-Steagall, says the Bloomberg report, "also would reduce the need for the taxpayer bailouts that added between 9 percent and 49 percent to the profits of the 18 biggest U.S. banks in 2009, according to Dean Baker, co-director of the Center for Economic & Policy Research in Washington."

Still unpersuaded, however, are former Rep. Jim Leach (R-IA) and our one and only Federal Reserve chairman, "Big Ben" Bernanke.

Leach, former chariman of the House Financial Services Committee (and now director of the National Endowment for the Humanities), "said in an April 22 speech at a conference on financial reform sponsored by Boston University Law School and the Bretton Woods Committee": “Changes in Glass-Steagall did not precipitate this crisis.”

Big Ben, meanwhile,

told the Economic Club of New York on Nov. 16, “Plenty of firms got into trouble making regular commercial loans, and plenty of firms got into trouble in market-making activities.”

“The separation of those two things per se would not necessarily lead to stability,” Bernanke said.

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