Tulsi Gabbard has the news release Rep. Tulsi Gabbard, Lawmakers Call For Reinstatement of Glass-Steagall.
Background: In 1933, the Banking Act—also known as the Glass-Steagall Act—passed amid an atmosphere of chaos and uncertainty to address banking failures of the Great Depression. The goal of its lead cosponsors, Rep. Henry Steagall and Sen. Carter Glass, was to separate commercial and investment banking and restore confidence in the American banking system. In 1999, Congress repealed the Glass-Steagall Act and removed the barriers between investment banking and traditional depository banks. This action gave financial institutions and investment firms access to the deposits of the American consumer, which then were used to gamble on the Wall Street casino.
While I do favor a restoration of a modern adaptation of the Glass-Steagall act, and I was opposed to its repeal in 1989, I do realize that there are differences between 1933 and now. One difference is the recognition that the loanable funds model of banks is in low repute among some modern economists. See the article Banks are not intermediaries of loanable funds – and why this matters.
Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.
No doubt bank savings deposits do play some role in bank lending, and these deposits need to be protected. However, any policy aimed at protecting those deposits needs to be aware of how banks operate today. The ability of the Federal Reserve Bank to create US high-powered money without any constraint of the gold standard which we left in the early 1970s may play a significant role in commercial banks’ ability to lend with little regard for the amounbt of deposits they have. The paper on loanable funds model breezes over one issue in their description of how the banks make a loan transaction and a countervailing deposit transaction at the same time. That issue is that the loan is not callable for an agreed term of the loan, but the countervailing deposit can be and probably will be withdrawn almost immediately. I would guess the backup of the Federal Reserve is what makes this all possible. I still think my idea of banks borrowing at wholesale and lending at retail is what explains a lot.