Letter to Rep. John Lewis, Sen. Chambliss and Sen. Isakson Regarding 21st Century Glass-Steagall Act

In Open Letter on August 20, 2013 at 1:17 AM

August 20, 2013

Rep. John Lewis
343 Cannon House Office Building
Washington, DC 20515

Sen. Saxby Chambliss
416 Russell Senate Office Building
Washington, DC 20510

Sen. Johnny Isakson
131 Russell Senate Office Building
Washington, DC 20510

Dear Rep. Lewis, Sen. Chambliss and Sen. Isakson:

Please consider voting in favor of the new 21st Century Glass-Steagall Act in order to restrict checking and savings deposits insured by the Federal Deposit Insurance Corporation from being used to fund high-risk, speculative-grade ventures. Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA) and Angus King (I-ME) have officially sponsored the 21st Century Glass-Steagall Act to date. Only one in fifty U.S. senators is independent right now — i.e., Angus King of Maine and Bernie Sanders of Vermont – and both of them are in favor of such type of legislation.

Broad support for the 21st Century Glass-Steagall Act is evident in the United States and the United Kingdom. In the U.S., Vanguard Group founder John Bogle has called for re-implementation of the Glass-Steagall Act. Robert Lucas, the Nobel-winning economist, has additionally spoken favorably of the Glass-Steagall Act, highlighting the evidence of far fewer bank failures occurring during the period prior to the Glass-Steagall Act’s repeal in 1999. More generally, risk management instruments like Value-at-Risk and credit default swaps have been especially criticized by market practitioners like Warren Buffet, John Reed and Nassim Taleb, given their “superspreader” capacities. Paul Volcker, former Federal Reserve chairman, has even offered a history lesson in economics, going as far as pointing out to Americans that Adam Smith “advocated keeping banks small.”

Interestingly, American economists George Akerlof and Paul Romer’s earlier work from 1993, Looting: The Economic Underworld of Bankruptcy for Profit, which examined the prior Savings & Loan crisis of the 1980s, when applied to the present period swell in bank failures suggests that wrong incentives undertaken, this time by bank managers, are still creating rational opportunities for short-term individual “looting” of company resources at the expense of broader company longevity. Here is one prescient section from Akerlof and Romer, “Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. Bankruptcy for profit occurs most commonly when a government guarantees a firm’s debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large banks, student loans, mortgage finance of subsidized housing, and the general obligations of large or influential firms.”

From the American perspective, rather dramatically, if you plot a long time-series graph of the total assets of the U.S. banking sector (with “bank” broadly defined) divided by the total gross domestic product of the country, then you will see that in 1947 the ratio was 116% and by 2013 the ratio has nearly quadrupled to 435%.

Lord Robert May, former chief scientific advisor to the U.K. government and president of the Royal Society, has already pointed out in his cross-disciplinary work studying the effects of complexity in the banking sector on industry health, that the right direction for industrial organization of the financial sector is to have the banks go back to “not having everyone doing everything.” Specifically of interest, he has drawn light on how large the banking sector has grown from 1880 to today during a three day series of lectures presented at the Santa Fe Institute back in October. For roughly 100 years, he documents, the ratio of total assets of the U.K. banking sector (again with “bank” broadly defined) divided by the total gross domestic product of the country measured roughly 50%; however, by the 2000s the ratio had jumped to over 500%. The British takeaway, therefore, is that more homogeneity of diversity in the banking sector within particular banks’ balance sheets coupled with thin capitalization levels has caused the broader real economy to become more vulnerable to widespread, general failure.

Other major prescient Er-like warnings of risks building up in the financial sector prior to the 2007-M12 recession are best evidenced by the efforts of Brooksley Born, former chairman of the Commodity Futures Trading Commission, and Raghuram Rajan, former chief economist of the International Monetary Fund. And recently, Kenneth Arrow, the Nobel-winning economist, has highlighted conflicts of interest present in the industry from a structural viewpoint and provided a general critique of the industry’s lack of information symmetry. Lord Bogle might describe such an “ill-graced” pattern as representing a move away from professionalism and toward excessive salesmanship.

On a related note, New York University economics professors Robert Engle and Viral Acharya’s advice regarding reform of the broader off-balance sheet financial sectors, i.e., the government sponsored enterprise (GSE) sector and private sponsored enterprise (PSE) sector, prepares well the way for right contributions to be embraced during the next major phase of yet-to-be performed financial reform aimed at improving the stability of the mortgage industry. Adoption of proposals of former Resolution Trust Corporation regulator William Black regarding improvement of Federal Bureau of Investigation and bank regulatory agency co-operation will also work to reduce occurrences of “control fraud” in the industry if taken up seriously.

In summary, at merely 30 pages in length, the 21st Century Glass-Steagall Act is a safe and sound, “less is more” styled approach to building the proper foundation for a more stable economy, one that Ludwig Mies van der Rohe and Frank Gehry would agree with, and financial policy architects ought respectfully agree with alike and welcome en masse. Roman engineers would call the act a bridge worth camping under. Therefore, the efforts ascribed in the act’s introduction are well worth the heavy lifting and tested medicine prescribed there-in, i.e., “To reduce risks to the financial system by limiting banks’ ability to engage in certain risky activities and limiting conflicts of interest, to reinstate certain Glass-Steagall Act protections that were repealed by the Gramm-Leach-Bliley Act, and for other purposes.”

One hundred years ago, Woodrow Wilson, Federal Reserve Act presidential author and Georgian formerly, reminded Americans to recall the origin of banking as “founded on a moral basis and not on a financial basis.” Earlier, Benjamin Franklin, nearly 200 years ago, printed, “An ounce of prevention is worth a pound of cure.” Banking and insurance have attributable roots in the great “wisdom traditions” and “ancient truths” of the world’s religions. Therefore, it could rightfully be argued that the time has returned once again to “put away childish things” and listen and act upon the life lessons taught to us by Greek myth, Judeo-Christian charity and Royal Society-caliber science.

I look forward to your response.


James Breedlove


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