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Report From the White House: Would Glass-Steagall Have Saved Us?

http://www.fool.com/investing/general/2009/10/19/report-from-the-white-house-would-glass-steagall-h.aspx

Dayana Yochim
October 19, 2009

We're not shy about advocating for shareholder rights and making sure our members are heard on important matters that affect our portfolios. That's why the White House asked for feedback from the Motley Fool community and agreed to answer your questions. Here is the third installment of our interview with Austan Goolsbee, chief economist for the President's Economic Recovery Advisory Board.

It's no surprise that investors in Fooldom are outraged about the risky practices and untenable leverage taken on by "too big to fail" financial institutions. That these companies were, in fact, doing business within the letter of the law is fuel for the White House's ambitious plan to overhaul financial regulation.

Many of you who made posts to our article calling for questions about the White House's financial regulation reform plan harkened back to the good old days, when Glass-Steagall was the law of the banking land.

  • Whatsafool wrote: "I have two words to deliver to the Administration: Glass Steagall. This law, dismantled by [former Sen. Phil] Gramm and his ilk, protected Americans from economic collapse very nicely, thank you, for 50 or so years."
  • Markgiese proposed warning labels such as the ones you see on cigarette boxes, to make sure investors know exactly how financial products and services affect the consumer's financial health: "Examples: Brokers don't make money because they help you increase your income, they make money on each completed transaction. Financial advisors don't make money when you successfully retire with a comfortable income. The growth of your nest egg provides a very small incremental improvement in the advisor's overall income. The initial sale is all they are paid to care about. ... Ratings agencies that are paid by the organizations they are rating cannot generate unbiased appraisals."
  • Lastly, 1ChefJeff painted a picture of how he thinks the rules of separation should work: "Reinstate the separation of banking from securities underwriting a la Glass Steagall but without the [loopholes] that existed in Glass Steagall. Banks need to provide credit to individuals and business. ... Insurance companies need to sell insurance. ... Brokers need to advise clients on stocks & bonds. ... Car [manufacturers] need to build cars, not loans. ... Retail chains need to sell product, not be banks ... and all of them need to be small enough to go out of business when they fail to provide what their consumer wants without a major shake-up to the financial marketplace."

Great comments, Fools. And so, on your behalf, David Gardner and I asked Austan Goolsbee, chief economist for the President's Economic Recovery Advisory Board, if new laws -- a la Glass-Steagall -- are in the cards.

Scroll down just a few inches to watch the video. Or read on for a briefing on the history of banking regulation and how the rules of the road have been changed over time.

Your Gla