Sunday, November 8, 2015

Simon Johnson - Resurrecting Glass Steagall

In this recent article on Project Syndicate, former IMF Chief Economist Simon Johnson calls for a return to a more regulated environment for the big banks and says that failure to do so is "jeopardizing the safety of the financial system on a regular basis." Below are a few quotes from the article and then some added comments.

"A major shift in American politics has taken place. All three of the remaining mainstream Democratic presidential candidates now agree that the existing state of the financial sector is not satisfactory and that more change is needed. President Barack Obama has long regarded the 2010 Dodd-Frank financial-reform legislation as bringing about sufficient change. Former Secretary of State Hillary Clinton, Senator Bernie Sanders, and former Governor Martin O’Malley want to do even more.

The three leading Democratic candidates disagree, however, on whether there should be legislation to re-erect a wall between the rather dull business of ordinary commercial banking and other kinds of finance (such as issuing and trading securities, commonly known as investment banking).

This issue is sometimes referred to as “reinstating Glass-Steagall,” a reference to the Depression-era legislation – the Banking Act of 1933 – that separated commercial and investment banking."                . . . . . . . 

My added comments: In this article Mr. Johnson says that the arguments being made by those on the inside that the system is much safer and able to withstand a shock are misleading. This article illustrates the very different points of view that we have noted here on the blog for some time. Most inside the system feel that actions taken since the 2008 crisis have returned the system to stability and enabled it to handle another shock to the system. Others like Jim Rickards say those inside the system are wrong and will not see the next crisis coming. 

We don't know who is right. What we can say is that if we do get another major crisis worse than 2008, we will likely see major monetary system change take place much more quickly than if we do not get another crisis. We will continue to follow it here to see how things actually turn out. If things stay stable for a long time and nothing much is happening related to major systemic change, we may not produce a daily blog article. If events do unfold more quickly, we will try to stay on top of them.

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