Guest Post by Jesse
Here is a reprint of a warning that was published in the NY Times in 1995 about Robert Rubin’s and Alan Greenspan’s misguided attempts to overturn Glass-Steagall.
Any reasonably informed student of economic history ought to have understood this argument.
There was a well-funded, decade long campaign led by the Banks to overturn Glass-Steagall. A lot of propaganda was written, and lot of political connections were made, and a lot of money was spent.
Too many were willfully blind. Some through their devotion to utopian ideology. Others through devotion to their careers. And even more just kept their heads down and hid their noses in their books and reams of irrelevant data.
And for the most part they still are, with many caught in a credibility trap.
Until the music stops.
Sunday, March 5, 1995To the Editor:Re “For Rogue Traders, Yet Another Victim” (Business Day, Feb. 28) and your same-day article on Treasury Secretary Robert E. Rubin’s proposal to eliminate the legal barriers that have separated the nation’s commercial banks, securities firms and insurance companies for decades: The American Bankers Association, Senator Alfonse M. D’Amato, Representative Jim Leach and Treasury Secretary Rubin are gravely misguided in their quest to repeal the Glass-Steagall Act.Their contention that insurance companies, commercial banks and securities firms should be freed from legislative obstructions is predicated on fallacious, historically inaccurate statements. If the Baring Brothers failure does not give them pause, a history lesson is our only hope before the Administration and bank lobby iron out their differences and set the economy back 90 years.The argument that American financial intermediaries will become “more efficient and more internationally competitive” is false. The American financial system is the most stable, most profitable and most dynamic in the world.The notion that Glass-Steagall prevents American financial intermediaries from fulfilling their utmost potential in a global marketplace reflects inadequate understanding of the events that precipitated the act and the similarities between today’s financial marketplace and the market nearly a century ago.Although Glass-Steagall was enacted during the Great Depression, it was put in place because the Aldrich-Vreeland Act of 1908, the blue-sky laws following 1910 and the Federal Reserve System of 1913 failed to keep the concentration of financial power in check.The investment climate that ultimately led to Glass-Steagall was one filled with emerging markets, interlocking control of productive resources and widespread bank ownership of securities.Ever since railroad securities began driving secondary capital markets in the late 1860’s, “emerging markets” have existed for investors looking for high-yield opportunities, and banks have been primary agents in industrial development. In the 19th century, emerging markets were scattered throughout the United States, and capital flowed into them from New York, Boston, Philadelphia and London. In the same way, capital flows from the United States, Japan and England to Latin America and the Pacific rim — today we just have more terms to define the market mechanisms.The economy and financial markets were even more interconnected in the 19th century than now. Commercial and investment banks could accept deposits, issue currency, underwrite securities and own industrial enterprises. With Glass-Steagall lifted, we will chart a course returning us to that environment.J. P. Morgan and Andrew Mellon made their billions through inter locking directorates and outright ownership of hundreds of nationally prominent enterprises. Glass-Steagall is one crucial piece of a litany of legislation designed to place checks and balances on the concentration of financial resources. To repeal it would be tantamount to bringing back the days of the robber barons.The unbridled activities of those gifted financiers crumbled under the dynamic forces of the capital marketplace. If you take away the checks, the market forces will eventually knock the system off balance.MARK D. SAMBERStamford, Conn.Feb. 28, 1995The writer is a management consultant specializing in business history.