Trump Reiterates Support for a New Glass-Steagall Act, But It Will it Pass Congress?

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Yves here. This Real News Network interview discusses one of the few campaign promises that Trump hans’t yet abandoned, that of reviving Glass-Steagall.

SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

Earlier this month, President Trump reiterated his commitment to a campaign promise that he made last year during the presidential campaign to break up large banks and to reinstate a new version of the so-called Glass-Steagall Act. This is the law that for over 60 years separated investment banks from commercial banks. The law was repealed in 1999 under President Bill Clinton. Some economists say that the repeal of the Glass-Steagall Act contributed to the 2008 financial crisis. Others say that other forms of banking deregulation was far more important for having caused the crisis.

As the case may be, progressive senators such as Bernie Sanders and Elizabeth Warren have also proposed reintroducing a new Glass-Steagall Act, arguing it would be better to protect savings accounts of ordinary citizens. Joining us now to examine this issue is Gerald Epstein. Gerald is professor of economics at UMass Amherst, and he is the co-director of the Political Economy Research Institute at UMass Amherst. Thanks for joining me today, Gerry.

GERALD EPSTEIN: Thanks for having me, Sharmini.

SHARMINI PERIES: Gerry, not only did Trump mention reinstating Glass-Steagall during his campaign, but the Republican Party even included it in a statement in their campaign documents. However, Trump is also proposing to significantly deregulate the banking sector. How do you explain Trump’s positions on the financial industry and is this a contradictory approach?

GERALD EPSTEIN: Yeah, it is a contradictory approach at one level, but in fact, Trump is doing this kind of thing all over the place. He’s talking about renegotiating NAFTA but promoting trade at the same time with China. It’s just one thing after another. I think part of it reflects these divisions within his administration and within his coalition, between on the one hand capitalist, Wall Street big business, and on the other hand trying to act as if he’s still going to do something for the working-class voters who voted for him. Part of it is trying to negotiate this division between part of his base, who don’t like the big banks, who want them broken up, and his money coalition, which is going to feed him the power that he needs and the money that he needs at the top, the bankers and the business people.

Part of it I think is a strategy to keep people guessing. This keeps the bankers on their toes, and it keeps them wanting to placate Trump, and hoping that they have him in their back pocket, so keep them guessing. Part of it is to get more campaign contributions for himself from bankers, to make sure that he doesn’t do this. Part of it is a strategy, part of it is a divided coalition, and I think part of it is just this chaos that is the Trump administration.

SHARMINI PERIES: Right. It’s interesting that, as you know, the Trump administration has decided not to make public, at least the records public, of who comes and goes from the White House. Anyone who’s lobbying him, who’s there from the banking industry, we wouldn’t even know. In your opinion, who in the Trump administration would stand to benefit from the reinstatement of the separation between financial and commercial banking?

GERALD EPSTEIN: There’s been some interesting arguments made by Dennis Kelleher at Better Markets, who was on the Hill for a long time and understands these processes quite well. He makes an interesting point that Gary Cohn and Goldman Sachs, Gary Cohn used to be the head of Goldman Sachs, is an example of an investment bank that would actually possibly benefit from this. That is, if the Glass-Steagall Act that Trump is proposing is a complete substitute for the Dodd-Frank and any other financial regulations, what it would do would be to free up Goldman Sachs and all the other investment banks that decided to go to that side of the divide and have very little regulations on them, and let them do whatever they want. At this point, after having been bailed out by the taxpayer in 2008, they’re in pretty good shape, so they could go off to the races doing what they were doing before with very little regulation. The Goldman Sachses of the world wouldn’t actually be hurt by this, and it could actually benefit from it, especially if this is a cover for getting rid of all of Dodd-Frank and all the other regulation.

SHARMINI PERIES: Right. What about on the political side? Wall Street more generally is quite opposed to a reinstatement of this law, but given that Republicans are close to Wall Street and they now have control over Congress, and as you say, Wall Street might be open to all of this, but these guys are the ones that are lining the pockets of Congress members as well. Something like this, do you think that it’s likely to happen given all of these interests?

GERALD EPSTEIN: No, I don’t think it is. I think it’s a lot of smoke and mirrors. I think what’s likely to happen is the massive deregulation of Wall Street and the banks. There’s the Choice Act. There’s other deregulatory acts that are being proposed to make it almost impossible to regulate anything, including Wall Street. I think that’s the major thrust of what’s coming down the pipe. I think most of this talk about breaking up the banks on the Trump side is throwing some red meat to the base, but it’s not going to get much further than that.

SHARMINI PERIES: Right. Do you think that reinstating Glass-Steagall would be a good idea in general? I know that in the past, people like Bernie Sanders and Elizabeth Warren have supported reinstating it as well, at least in reintroducing a Glass-Steagall-type act. Do you think it’s a good idea?

GERALD EPSTEIN: As you said, Senator Warren along with McCain, Cantwell, and King have introduced this 21st-century Glass-Steagall Act, which is an updated version of Glass-Steagall, which is designed to separate investment and commercial banking. The idea is to not let commercial banks that have the support of the taxpayer, access to the Federal Reserve liquidity and safety net, etc., make it so that they cannot engage in really speculative and dangerous activities to reduce the chances that they’ll have to be bailed out in the future. On the other hand, the idea is to have investment banks not be able to engage in accepting deposits and the like, and they can perhaps take a riskier position.

I think the key thing is we have to break up the big banks. We have to break up the big banks both for economic and political reasons. The economic reasons is that they’re able to blackmail the economy. They take on risk. They do speculative and dangerous activities, and then when they get in trouble, they tell the government and the taxpayer, “Either you bail us out or we’ll destroy your economy.” This has got to stop.

The second reason we have to break up the big banks is because of the political power the big banks have, as we just talked about, in organizing Congress, organizing Washington. I think a 21st-century Glass-Steagall Act is one way to start breaking up the big banks, and it has to be done in combination with reinforcing the regulations that are already on the books, so leverage requirements, capital requirements, etc., not as a substitute for these.

I think there’s a lot to be said for working with the kinds of proposals that Warren and Bernie Sanders and so forth have proposed, and try to make sure that they’re done in such a way that they end up actually in breaking up the political behemoths and the economic behemoths that are these big banks.

SHARMINI PERIES: Right. Lastly, Gerry, if you believe that this is all somewhat smoke and mirrors, and this isn’t actually going to be implemented, how close are we? Given what’s going on in the economy, there’s various bubbles again blowing up, and the economy is supposedly growing, the stock market is certainly growing. How close are we to another financial collapse of the kind we saw in 2008?

GERALD EPSTEIN: It’s really hard to say. The banks are sitting on a lot of liquidity. They have huge safety nets and cushions right now, because they got bailed out by all of us. I don’t think that the amount of leverage in the system, the amount of risky debt, is near what it was in 2007-2008. I also don’t think that there’s an obvious one bubble out there like the real estate markets we saw then.

On the other hand, the next crisis is not going to look exactly, maybe not much, like the previous one. These indicators that I just told you about, which would suggest we’re not going to have exactly the same kind of crisis, doesn’t mean we’re not going to have one. I just don’t think that this is the major problem that we’re going to face in the next year or so.

More likely is going to be some constitutional crisis, a major military adventure by the Trump administration, something of that nature. Of course, that’ll interact with the financial markets and possibly lead to serious financial instability, which could in turn engender some kind of financial crisis. I think things are very dangerous looking forward, but it’s unlikely we’re going to see something quite like what we saw in 2007-2008 any time soon.

SHARMINI PERIES: All right, Gerry. I thank you so much for joining us today, and we look forward to having you back.

GERALD EPSTEIN: Thanks a lot.

SHARMINI PERIES: Thank you for joining us here on the Real News Network.

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  1. vlade

    If, as mentioned above, Trump introduces a new G-S act as a silver bullet, and drops all other investment (not to mention any) bank regulation (i.e. any capital requirements etc.), it’s going to be worse than now. On the other hand, it could lead to the de-globalization of banking, which may not be a bad thing. I.e. Europeans would definitely not introduce G-S equivalent, and thus have regulatory/capital requirements. There are already requirements for separate incorporations for larger banks in EU, and I could see that in response (to US dropping all investment banking regulation apart from G-S ) EU would start a requirement that anyone, no matter how large or small, operating in EU must run under full EU regulation. Which means that it would add a lot of operational costs to any non-EU banks wanting to operate in EU, effectively creating a large NTB for EU financial markets.

    Very likely, US would retaliate (as otherwise US market would be open to non-US banks but not vice-versa, which I’m sure US banks would not like at all), most likely by some clearing shenanigans. So banking would split from the global industry it’s now into a much more regional.

    1. Colonel Smithers

      Thank you, Vlade.

      Having worked on regulatory matters, mainly capital adequacy, from 2008 – 14 in / with Brussels (et al), one noticed two distinct camps, hawks (UK, US, Canada, Netherlands, Switzerland and Sweden) and doves (France, Germany, Italy and Spain). The doves dragged their feet from the launch of the G20 etc. in 2009. When Basel III was agreed, the hawks wanted the reforms implemented by 2015 and the doves by 2025, if at all / ever. 2019 was the compromise. The hawks felt that they could compromise as the market would reward banks which shaped up earlier, a fair assumption as it turned out.

      The above is to say that the EU does not need any excuse to roll back the post(?) crisis reforms, especially the government officials and MEPs who wheel out their trampolines when glamorous Goldman turns up. The core EU was never / is not interested in reforming the financial system apart from some grandstanding over pay. (The bonus cap was only voted through after a leak / display of banker arrogance in the FT the morning of the vote, so centrist and right wing MEPs had little choice, but to approve the proposal.) The EU’s plan for a capital market union (CMU), the proposal in the European Parliament for intermediate holding companies (as per Daniel Tarullo’s reforms) and the Commission’s kite flying for (Euro) clearing in (an EU) location allows for the retaliation and reversal of globalisation.

      See you soon. I will put something in the diary.

      1. vlade

        While I agree with you that the EU banks would happily roll back their regulation, it’s much harder to keep London/NYC out of your backyard when there’s no regulation, as opposed to when you can claim they aren’t regulated but you are. I’m not sure what CA/SG/DB etc would prefer – a world where they can compete globally but at the cost of the non-EU having unfeterred access to the EU markets, or having EU bailwick for themselves, maybe at the cost of not being able to do much in US.

  2. jackiebass

    Knowing how republicans operate this new will end up being worse than what we now have. Health care is a good example. I heard Trump say the replacement for Obamacare will be BETTER, LESS EXPENSIVE, and COVER MORE PEOPLE. These are his words. Later he said he didn’t know health care was so complicated. This is a bait and switch. The same will be true of regulating Wall Street as well as almost anything republicans pass. In an interview wit the BBC Noam Chomsky called the republican party the worst terrorist organization in history.

    1. RUKidding

      That’s how I feel and see it. Trump may, indeed, plow forward with this, but then what? Once the R-Team gets done with it, it’ll be worse than what we have now.

      Sadly, I’m not at all optimistic about this.

      Trump also promised his fans that he’d “protect” and strengthen Medicare and Social Security. During the campaign, he also told Paul Ryan that he was just “saying that to get votes.” Paul Ryan – at the behest of the venal horrible Koch brothers, who apparently want the serfs to die and die quickly – is itching to cut and gut Medicare and Social Security.

      I can only imagaine a smoking ruin if Ryan and his evil band of brothers try to “improve” on Glass-Steagall.

  3. Corbin Dallas

    I can’t believe y’all are taking the Tramp’s words at face value, parsing them for actual truths. I’m not saying he isn’t different from the everyday humdrum corrupt senators & reps, but comeon, the man just says whatever he feels like to appease whoever he feels like. There’s no meaning (left OR right) in his words – just capitulation to whatever vibe is in the room, with no followup or power to do anything about it.

    Corey Robin has excellent words about this, here

    1. dontknowitall

      Corbin Dallas@ 8:32am
      If so please explain TPP and also the upcoming NFTA negotiations. Corey Robin’s wise remote psychobabble is worth exactly what you paid for it. If using Tramp for Trump is supposed to convince me of anything it has not worked.

    2. nonsense factory

      Obviously you didn’t bother to read the article or watch the video or read the first comment above by vlade, the comment that begins:

      If, as mentioned above, Trump introduces a new G-S act as a silver bullet, and drops all other investment (not to mention any) bank regulation (i.e. any capital requirements etc.), it’s going to be worse than now. . .

      Separating commercial banks that specialize in auto, home, small business and industrial/infrastructure financing is obviously a good idea, and investment banks should be treated like the Las Vegas house-always-wins casino operations that they are. While Glass-Steagall would prevent the kind of fraud involving, say, a commercial bank’s customer deposits being used by an investment bank to artificially inflate certain corporate stock values in the kind of pump-and-dump schemes Goldman Sachs et al. were running prior to 2008 (and which the FBI refused to investigate and Justice refused to prosecute), it’s just as obvious that all the other regulations need to stay in place as well.

  4. oh

    I think Trump is blowing smoke as usual. I don’t see why he would support any bank regulation after allowing Goldman-Sachs to dictate his appointments!

  5. Vatch

    Will it pass Congress? Well, here are the existing bills, and there’s only one Republican co-sponsor for the Senate bill, and two for the Republican bill. There are 5 Democratic Senators and 2 independent Senators among the co-sponsors of the Senate bill, and 45 Democratic Representatives among the co-sponsors of the House bill.

    S.881 – 21st Century Glass-Steagall Act of 2017

    H.R.790 – Return to Prudent Banking Act of 2017

    Unless large numbers of people contact their Republican Senators and Representatives about this, neither bill will pass.

  6. George Phillies

    Trump abandoned promises?
    Let’s see.

    Supreme Court. Promise kept.

    Wall: Advancing to Stage 2 bids. It’s being built at the full speed of government.

    Immigration: Now being litigated. (The Circuit Court for iirc DC and VA is getting much less attention than the 9th, but is perhaps more important.) And see “Supreme Court”.

    Employment: Hard to believe he has had an effect yet, but it is getting better.

    Imports hurting employment: The mandated legal studies are there for Steel and Aluminum.

    Tax reform: Proposal — as much detail as is worthwhile — sent to Congress. The President Proposes…Congress disposes.

    Regulation repeal: A whole pile of CRA resolutions passed through Congress and were signed.

    Expand the military: With some luck, this will be the promise he breaks.

    End NAFTA, renegotiate. We skipped straight to step 2.

    End ‘free trade’ TTIPS etc. Done.

  7. Wisdom Seeker

    Trump can’t change the law singlehandedly. Banking reform will not occur until the people elect a populist Congress.

    But the two parties will do everything they can to avoid nominating populist candidates for general elections.

    So those who want banking reform need to get pro-reform candidates into the primaries and then get out the vote for them. Just like Trump’s supporters did for him in the Presidential election, but at the district and state levels.

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