Lexington, KY - A Kentucky lawmaker plans to introduce a resolution in the state senate calling on Congress to reinstate a long-time set of banking regulations. Sen. Clark Perry, D-Louisville, wants to see the Glass-Steagall Act of 1933 reinstated because of what he calls “an imminent collapse of the banking system in both Europe and the United States.”
The Glass-Steagall Act separated investment and commercial banking activities. At the time it became law, overzealous commercial bank involvement in the stock market was believed to have been the main culprit in the catastrophic stock market crash of 1929.
In 1999, Congress repealed Glass-Steagall with passage of the Gramm-Leach-Bliley Act, which ended restrictions against affiliations between commercial and investment banks.
The repeal 13 years ago troubled Sen. Clark, who is now, for the third time, asking Congress to support Congressional House Resolution 1489, which reinstates Glass-Steagall. He suggests that if it could prevent a banking crisis for 66 years, it could do it again.
“I think bringing back Glass-Steagall will rebuild our shattered confidence in the whole economy,” explained Clark, in a recent phone interview. “Congress has talked more about the Roger Clemons steroid case than about the banking crisis of 2008 and the meltdown. We’re in a crisis. We cannot take another meltdown in this nation. I think it would be unrecoverable.”
Clark claims that stop gap measures would not be enough to separate commercial banking (depositors’ funds) from investment banking (private pools of capital). He thinks American taxpayers are at risk for the next round of bank failures with enormous risks being taken by financial service conglomerates.
“It would protect the small banks that are trying to be good stewards of the money people have (deposited) with them.”
Some banking experts disagree with the need to reinstitute those old restrictions. They feel the banking industry has enough safeguards in place today.
“If we put it back in place it wouldn’t affect more than ten or 12 institutions in the entire country. There are very few engaged both in the business of investment banking and commercial banking,” said Don Mullineaux, duPont Endowed Chair in Banking at the University of Kentucky’s Gatton College of Business and Economics. “They keep the two businesses separate themselves. I don’t think there is a lot of risk transferred from one to the other,” he asserted.
Mullineaux went on to explain that during the years Glass-Steagall was in force, none of the investment banks were regulated by the Federal Reserve. Now they all are; they are bank holding companies. In addition, the Securities and Exchange Commission regulates their underwriting activities.
“To my knowledge, no investment bank has ever failed based on its underwriting activities. The problem with Lehman Brothers, an investment bank (that failed in 2008), wasn’t underwriting. They had really bad investments, mainly sub-prime mortgages. Glass-Steagall wouldn’t have prevented that from happening,” Mullineaux concluded.
Clark says there are about 70 bipartisan sponsors of the congressional resolution, known as the Return to Prudent Banking Act. He wants the entire Kentucky delegation to get onboard as he rallies a grass roots campaign in the state and elsewhere. Recently, a similar local resolution was reintroduced by Louisville Metro Council member Dan Johnson also calling on Congress to reinstate Glass-Steagall.
Sen. Clark has been somewhat of a controversial figure, sending a personal letter to President Obama asking him to resign. He is also an admirer of Lyndon Larouche, an eight-time presidential candidate and notorious conspiracy theorist. Clark describes Larouche, who has compared President Obama to Adolph Hitler and claimed 9/11 was an inside job, as an economist and statesman.
Clark was asked why he, a state senator representing south and southwest Jefferson County, feels the need to delve into national and international financial matters. Clark replied that he has long been interested in these banking issues. “Look at my record and you’ll see this isn’t something I came up with whimsically yesterday,” said Clark, who is running for a second term in the senate and faces Republican real estate developer Chris Thieneman in November.
“I care about Kentucky. So goes the Fed, so goes the state of Kentucky.”
Mullineaux, the author of three books and dozens of scholarly articles on banking and finance issues, generally opposes more banking regulations. He thinks there are plenty of them already in place that provide safety nets to protect depositors and investors, so a return to Glass-Steagall is unnecessary.
If you are concerned about how Kentucky banking institutions would be affected by regulatory issues, don’t be, says the UK professor. “The impact on Kentucky banks (those chartered in the state) will be zero. They are small and are not involved in underwriting. They don’t combine the two businesses,” he concluded.
In addition to calling for all Kentucky members of Congress to co-sponsor HR 1489, Clarks is also urging state legislators nationwide to sponsor similar support resolutions and mobilize their members of Congress. “The time to act,” he stated, “is short.”
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Read Dan Dickson's article detailing views of local bankers.