With Senate Democrats itching to begin final debate on Wall Street reform, a floor vote this evening is expected to test Republican solidarity. Are all 41 GOP senators really willing to be seen as obstructing reform on behalf of Goldman Sachs and the rest of the high-flying finance industry? If not, who will break ranks?
So far, Charles Grassley of Iowa and
Susan Collins Olympia Snowe of Maine have both expressed support for a controversial proposal to strictly regulate derivatives, a step that the New York Times notes is “certain to anger some of Wall Street’s biggest players.” But that doesn’t mean they’ll vote tonight in favor of moving forward.
“Officials said the Democratic plan on derivatives included many tougher provisions put forward by Senator Blanche Lincoln, Democrat of Arkansas and chairwoman of the Agriculture Committee, including one that is fiercely opposed by major banks because it would force them to spin off much of their derivatives business. The rules say any bank dealing in swaps, a popular and lucrative derivative, would be barred from the Federal Reserve’s emergency borrowing window and also from federal deposit insurance.”
I’m sure the folks on Wall Street are rather flabbergasted by all this. Despite their central role in setting off the Great Recession, they have blithely continued to reap record profits while millions are unemployed as a direct result of Wall Street excess. They have continued to pay themselves enormous bonuses while assuring each other they are “doing God’s work,” confident that their money and influence would allow them to fend off meaningful attempts at reform.
I doubt they ever thought that things could come to this, with even their GOP allies reluctant to be seen defending them. (And yes, through the years, a lot of Democrats have also fed at the Wall Street trough, chief among them Chris Dodd of Connecticut, now trying to redeem himself by leading the reform effort.)
In that light, it’s interesting to read this account from Time magazine:
“Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed by both houses of Congress would rivet upon their institutions what they considered a monstrous system of guaranteeing bank deposits. Such a system, they felt, would not only rob them of their pride of profession but would reduce all U. S. banking to its lowest level. They saw their deposits which they had spent a lifetime to build up and protect with their good names confiscated by the Government to pay for the mistakes and dishonesty of every smalltown bankster.”
That account comes to us from June 5, 1933, upon passage of the Glass-Steagall Act creating the Federal Deposit Insurance Corporation. The then-conservative Time clearly didn’t think much of this “revolutionary enterprise,” suggesting that such government intervention would surely bring further disaster upon the U.S. economy:
“Bank deposit guarantee schemes have been tried in Nebraska, Oklahoma, Kansas, Mississippi, Texas, North Dakota, South Dakota and Washington. They have invariably ended in failure and loss, if not in outright scandal and default. They have weakened the moral fibre of bankers and served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.
Despite this evil-smelling State record Congress was determined to clamp a similar system down on all Federal Reserve member banks, make it optional with nonmember State banks. It was this arbitrary method of forcing big banks to stand sponsor for little banks that outraged Manhattan bankers. Big State banks in New York talked covertly of seceding from the Federal Reserve System rather than submit to such a levy. Even big national banks might exchange their Federal charters for State charters to escape from the Reserve. Such a withdrawal on a large scale might well wreck the whole Federal Reserve System and end an era in central bank history. On the other hand friends of the deposit guarantee loudly claimed that it would tend to drive all nonmember State banks into the Federal Reserve and create one national system, as no bank could do business outside the Government’s magic circle of deposit insurance.”
Clearly, the legislation did not produce the dire consequences that the folks at Time predicted 87 years ago. To the contrary, we are in this mess today in part because important restrictions in the Glass-Steagall Act of 1933 were abolished in 1999 in the name of free markets, allowing federally guaranteed banks to venture into high-risk areas where they had no real business.