Ex-Goldman Trump Advisor Drops Glass-Steagall Bombshell

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Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Is there hope?
According to “people with direct knowledge of the matter,” cited by Bloomberg, White House economic adviser and one of the ex-Goldman Sachs executives in the Administration, Gary Cohn, dropped a bombshell at a meeting on Capitol Hill yesterday.
The meeting was arranged by Senate Banking Committee Chairman Mike Crapo of Idaho. Lawmakers and their staffs from both parties participated in the discussion that ranged from tax reform to financial regulation.
Cohn said he generally is in favor of splitting commercial banks from everything else, in a return of sorts to the days of the Glass-Steagall Act. Bloomberg:

Cohn’s remarks were prompted by a question from Senator Elizabeth Warren, one of the finance industry’s most relentless critics, said the people who asked not to be named because Cohn’s meeting with Senate Banking Committee members was private.
The Massachusetts Democrat asked Cohn about his thoughts on Glass-Steagall. After Cohn answered, Senator Robert Corker, a Tennessee Republican, pressed the White House official to clarify his views.
The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

After the Glass-Steagall Act was repealed in 1999, it took only eight years of banking-free-for-all, huge mergers, and all kinds of risk-taking for these banks to grow from regional banks to global government-backed hedge funds and collapse under their own recklessness. The subsequent bailouts from the Fed of the banking system and of the biggest owners of financial and other assets have ruined the functioning of the US economy.
A new version of Glass-Steagall would likely separate in some manner commercial banking – taking deposits and making loans – from investment banking and hedge fund activities. It would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be much smaller, much less interconnected, and could be allowed to fail without bailouts and without risking the entire global financial system.
Cohn’s comments parallel language in the official party platforms of both Republicans and Democrats during the campaign. The Republican Platform 2016 said tersely:

We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.
“Sensible regulations can be compatible with a vibrant economy….”

The Democratic Platform was more detailed. After claiming Democrats “will not hesitate” to “downsize or break apart financial institutions,” it added:

Banks should not be able to gamble with taxpayers’ deposits or pose an undue risk to Main Street. Democrats support a variety of ways to stop this from happening, including an updated and modernized version of Glass-Steagall and breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy.

At the time, I pooh-poohed the language from both parties as simply another effort to extract more money from Wall Street by scaring them in a sort-of bipartisan manner. I didn’t expect to ever hear of it again. With ex-Goldman executives having taken important roles in the Administration, including Steve Mnuchin as Secretary of the Treasury, the threat of a modern Glass-Steagall seemed to have entirely dissipated.
Now Bloomberg notes that Cohn’s remarks “suggest he could be a wildcard should Congress get serious about reinstating the law.”
Splitting banks from the Wall Street casino would have less impact on investment banks and hedge funds like Goldman Sachs which is not heavily involved in commercial and retail banking. It would have a much bigger impact on JP Morgan, Citibank, or Wells Fargo, which are enormous commercial banks with a huge presence in retail banking, but are also giant investment banks and hedge funds. So maybe it’s easy for an ex-Goldman guy to talk.
The White House has been mum about any new version of Glass-Steagall. And nothing visible has happened in Congress in that regard. So it’s refreshing to hear that the idea of Glass-Steagall is still percolating beneath the surface, and that there are some unexpected supporters.
As much as I want a modern version of Glass-Steagall – it could replace most of the monstrous and immensely cumbersome Dodd–Frank Wall Street Reform and Consumer Protection Act put together in response to the Financial Crisis – I’m not given to wishful thinking. There a lots of reasons why it might never happen.
These split-up smaller banks couldn’t threaten the financial system any longer and would lose much of their lobbying power – a powerful reason to lobby against it with all their might.
If Congress were really serious, the Financial Crisis would have been the moment to ramrod a new version of Glass-Steagall through. But instead, we got what we got.
I doubt that Congress will be able or even willing to tackle it now, given its struggles to pass anything at all – and given the enormous power of Wall Street. But if it somehow happens anyway, pushed forward by people inside the Administration, such as Cohn, and on both sides of the aisle in Congress, stable, much smaller, and more manageable banks would be a big step forward for the economy.
And those who lost out on the Fed’s “wealth effect?” Read…  This Economy is Ruined for Many Americans

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