Paul Manafort, Donald Trump’s campaign manager, told reporters Monday that the GOP platform will feature a call to reinstate Depression-era bank regulations known as Glass-Steagall. The Democratic platform will reportedly also include language along these lines. Both Bernie Sanders and Martin O’Malley campaigned on versions of this idea, though Hillary Clinton did not.
Among options for reducing risk in the financial system, a new Glass-Steagall rule is not rated particularly highly by economists. It is, however, something that a large number of America’s small and midsized regional banks are pretty enthusiastic about, which gives it more legislative legs than your average new regulatory push. And it has long had a certain amount of bipartisan support, with Elizabeth Warren and John McCain cosponsoring legislation to bring it back even while Barack Obama has always opposed it.
Trump’s populist positioning here seems like savvy politics, because Clinton has already dug herself in as an opponent of bringing back Glass-Steagall. It was her husband who signed the law that repealed Glass-Steagall in the first place, and she already took a bunch of licks during the primary for declining to bring it back.
What is Glass-Steagall and what did it do?
Until the 1990s, American banking and European banking were importantly different on a structural level.
A European “bank” would be an integrated provider of financial services, offering a retail banking operation (with checking and savings accounts) and also an investment banking operation. An investment bank is the kind of institution that a company turns to if it wants to borrow money by selling bonds, if it wants to stage an IPO, or if it wants to buy another company (or be bought by one).
In the United States, by contrast, this kind of combination of business activities was made illegal back during the Great Depression. This was part of a broader series of financial reforms that were adopted in the wake of a stock market crash and wave of bank failures. This rule was called Glass-Steagall after Sen. Carter Glass of Virginia and Rep. Henry Steagall of Alabama.
These rules had been substantially weakened over the decades, and in 1999 the Gramm-Leach-Bliley Act repealed them altogether.
The motivations for this were varied, but the main case for repeal of Glass-Steagall was the sense that American investment banks were earning fat monopoly profits and ought to face more competition. The case against it was that Glass-Steagall repeal would lead to a dangerous amount of risk in the financial system and risk a new financial crisis. The case against that case was that over the years the Federal Reserve had learned how to use monetary policy to insulate the real economy against economic problems cased by financial crises.
Then came the financial crisis of 2007-2008 and the Great Recession of 2008-2009.
Did repealing Glass-Steagall cause the financial crisis?
The answer here is pretty clearly no.
As part of Glass-Steagall’s institutional legacy, the United States still has lots and lots of banks that operate as pure retail banks with no investment banking or insurance element. Lots and lots of these banks make mortgage loans that were, on some level, based on the idea that a nationwide house price bubble was impossible. And lots and lots of these banks went bust during the crisis as a result. Nothing special happened related to Glass-Steagall.
What is true is that the same general political climate that led to Glass-Steagall repeal created the conditions for the financial crisis.
In particular, the confidence that the Fed could and would insulate the real economy from the consequences of a financial crisis proved to be entirely misguided.
The Obama administration passed the Dodd-Frank financial regulation overhaul to step away from that presumption. Now banks would be regulated under the presumption that excessive risk-taking wasn’t just a possible threat to the money in the FDIC insurance fund, but a clear and present danger to the entire American economy.
But Dodd-Frank did not bring back the old separation of investment banking and retail banking.
Depending on who you ask, that’s either because Obama is a bought-and-paid-for Wall Street shill, or else because universal banks are actually less risky and failure-prone due to their more diversified portfolio of businesses.
Is Donald Trump tough on Wall Street?
Bringing back Glass-Steagall is a clever way of getting to Hillary Clinton’s “left” on a high-profile controversy. It brings Trump into alignment with Warren, Sanders, and other well-known Democrats and highlights the reality that Clinton is closer to the views of the big players on Wall Street than are many other figures in her party.
On the other hand, Trump has promised to entirely repeal the Dodd-Frank law and return American financial regulation to its Bush-era state.
In terms of policy substance, that’s an odd agenda to pair with a new Glass-Steagall law. But Trump is not really the kind of person who is super-interested in policy substance or consistency.