By Adam Alonzi
Of the New Deal programs, the Glass-Steagall Act is perhaps the most important. The act, among other things, barred banks from dealing in private securities. It was born largely out of psychological necessity: in 1933 public confidence was understandably abysmal. Yet like many lengthy and well-meaning bills, the Glass-Steagall Act was not without loopholes, stumbling blocks and horrendous blunders.
One result of the bill, the Federal Deposit Insurance Corporation, is an example of a fine idea badly implemented. The closing of nearly 9,000 banks in the wake of Black Tuesday resulted in the loss of 1.3 billion dollars. Those who trusted banks with their savings were justifiably outraged. The FDIC does not insure consumers directly; it insured banks. The FDIC, separated from the rest of its parent bill, incentivizes failure. After the war the Glass-Steagall Act gradually became a head without a body or, more appropriately, a body without a head.
Had the bill been obeyed in its entirety the FDIC would have been an unequivocally positive agency. Alas, like so many failed attempts to control human action, Roosevelt’s baby quickly transformed into an impotent old man. The 1960s saw resurgence in speculation by banks thanks to new interpretations of the bill. Politicians and armchair economists love to explain how conglomerates could not bypass their hypothetical policies, though history shows that the sheer cunning of these entities, coupled with their powers of persuasion, makes it easy to circumvent airtight legislation.
The Glass-Steagall Act was partially repealed by the Gramm-Leach-Biley Act. The body was comatose; the bipartisan coalition behind the GLB simply put it out of its misery. This is one of the reasons why the GLB was not, as some commentators have claimed, the sole cause of the global economy’s nosedive. Greenspans slashing of interest rate in 2003 and the sudden rise in foreign investments in the US housing market were also contributing factors. The greedy banker narrative, however, is infinitely more palatable to people who cannot stomach econometrics or critical thought.
The Glass-Steagall Act sounded wonderful on paper, but it did not deliver what it promised. Rather than repeating our mistakes we ought to make sure banks notify their customers upfront about their activities. The FDIC and its counterparts will not be abolished or reformed. Therefore a clear classification system should be made available to consumers before they select a bank. They can assess the risks and rewards for themselves. Those with less will invest conservatively; those with more will supply wild-eyed venture capitalists with the funds they need.
In accordance with FDA regulations food manufacturers must place allergy warnings on their product’s packaging. They would do this without coercion to avoid lawsuits and PR nightmares. Financial institutions are different. Finance is shadowy, complex and fraught with risk, and because of the FDIC consumers are shielded from being directly affected by the accumulation of bad investments. Savings are insured but economies are harmed and governments must spend huge sums to bail out purportedly private companies.
Viable solutions, not symbolic bandages, are what we ought to demand. Profit motives should not be punished but an environment in which pure avarice, funded at the expense of the taxpayers, should not exist either. The simple solution to this issue is the same as many others: the destruction of ignorance and apathy.
Adam Alonzi is a writer, biotechnologist, futurist, inventor, investor and programmer. He has had a lifelong fascination with history, economics and policy making. He is currently pursuing a degree in biochemistry and is the author of two novels: A Plank in Reason and Praying for Death. adam61803399@gmail.com