The Case For A Super Glass-Steagall, by David Stockman

With deposit insurance, the Fed as the lender of last resort, and Too Big To Fail, the government is on the hook for banking system risk, especially risks taken by the largest banks. This is folly that will end in tears. David Stockman proposes moving banking risl to the market. From Stockman at davidstockmanscontracorner.com:

Donald Trump can instantly get to the left of Hillary with respect to Wall Street and the one percenters by embracing Super Glass-Steagall.

The latter would cap U.S. banks at $180 billion in assets (<1% of GDP) if they wished to have access to the Fed’s discount window and have their deposits backed by FDIC insurance. Such Federally privileged institutions would also be prohibited from engaging in trading, underwriting, investment banking, private equity, hedge funds, derivatives and other activities outside of deposit taking and lending.

Instead, these latter inherently risky economic functions would be performed on the free market by at-risk banks and financial services companies. The latter could never get too big to fail or to manage because the market would stop them first or they would be disciplined by the fail-safe institution of bankruptcy. No taxpayer would ever be put in harms’ way of trades like those of the London Whale.

By embracing this kind of Super Glass-Steagall Trump would consolidate his base in the flyover zones and reel in some of the Bernie Sanders throng, too. The latter will never forgive Clinton for her Goldman Sachs speech whoring. And that’s to say nothing of her full-throated support for the 2008 bank bailouts and the Fed’s subsequent giant gifts of QE and ZIRP to the Wall Street gamblers.

Besides, breaking up the big banks and putting Wall Street back on a free market based level playing field is the right thing to do. Today’s multi-trillion banks are simply not free enterprise institutions entitled to be let alone.

Instead, they are wards of the state dependent upon its subsidies, safety nets, regulatory protections and legal privileges. Consequently, they have gotten far larger, more risky and dangerous to society than could ever happen in an honest, disciplined market.

Foremost among these artificial props is the Fed’s discount window. The latter provides cheap, unlimited funding at a moment’s notice with no questions asked. The purpose is to insure banking system liquidity and stability and to thwart contagion, but it also nullifies the essential bank management discipline and prudence that comes from fear of depositor flight.

Likewise, FDIC insurance essentially shields banks’ balance sheets and asset management practices from depositor scrutiny. Whatever its merits in behalf of the little guy, there is no doubt that deposit insurance is a fount of moral hazard and excess risk-taking in the bonus-driven executive suits.

Indeed, the function of maturity transformation—–borrowing short and lending long—-which is the essence of fractional reserve banking is inherently risky and unstable. Once upon a time the state attempted to limit banks’ propensity for excesses by permitting injured depositors to bring suit against stockholders for double their original investment. That tended to concentrate the minds of bank boards and stock owning executives.

The opposite incentives prevail in today’s bailout regime. Under current legal and regulatory arrangements shareholders and boards face no liability at all—let alone double liability—-for mismanagement and imprudent risk taking. Instead, insolvent or failing institutions are apt to be bailed-out; and even if share prices are permitted to plunge, boards and executives are likely to be given new stock options struck at the post-collapse price. That happened in every big bank in America after the 2008 meltdown.

To continue reading: The Case For A Super Glass-Steagall

One response to “The Case For A Super Glass-Steagall, by David Stockman

  1. Something much more effective in the long term – and, with the doubtless continued overwhelming influence of “the K-street lobby complex” hardly more fanciful in terms of realpolitik feasibility – would be to reverse the criminalization and suppression of alternative, free-market currencies.

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