The Vice Chairman of the Federal Deposit Insurance Corporation (FDIC) has vigorously defended the reenactment of parts of the Glass-Steagall act sought by Senator Elizabeth Warren, along with other prominent members of the United States upper house. The FDIC VC has defended the act from criticism that it would have little effect as it would not have halted the 2008 financial crisis.
An email released today, written by Thomas Hoenig, responded to comments that the 2008 financial crisis was caused by institutions that would not be covered in Glass-Steagall. Hoenig vigorously disagreed with those accusations and supported his arguments.
The Glass-Steagall Act – Blurring Lines
The Glass-Steagall Act, or at least the parts that are currently being pushed toward reenactment, was designed to stop commercial banks and investment banks stepping into each other’s spheres of operation. According to some commentators, the banks that caused big problems in the financial crisis, like Bear Stearns and Lehmann Brothers, were purely investment banks.
According to Hoenig, there existed a “distinction without a difference” at the time of the crisis. Banks like Lehmann and Bear Stearns began to offer short term liabilities in order to fund long term assets. These “deposit like instruments” mirrored the workings of commercial banks at a fundamental level.
Hoenig’s major point is that any suggestion that the banks involved in the 2008 financial crisis were not violating key parts of the redundant Glass Steagall Act are painting history with a rather pointed brush. The activities of the banks would certainly be curtailed by the current act.
Stopping Another Crisis
Hoenig was responding to an argument that suggested that Glass-Steagall could not have stopped the financial crisis, and therefore the law should not be passed. Whether or not it would have prevented the crisis is difficult to say, but it is clear that it would have made some of the activities that led to the crisis more difficult.
The Glass-Steagall legislation should not be reenacted if the intention is to stop the 2008 financial crisis from happening again. It should not be kept off of the books if it could not have stopped the crisis. The United States has had tens of financial crises in the last 200 years, and no two are exactly alike.
Glass-Steagall prevents a certain amount of crossed incentives and conflict of interest in banks. According to Hoenig it would make banks more accountable for their actions.
