That Fateful Day – November 12, 1999

First some background. The Great Depression that followed the stock market crash of 1929 saw an unprecedented wave of bank failures. At the time we didn’t have the banking giants that we see today, most banks were of the small, neighborhood variety. There was no such thing as deposit insurance, Federal or otherwise and when these banks failed the depositors lost their money. A failure at one would lead to a panic at another, which, in turn, caused that one to fail as well. As the panic spread more and more banks failed. It became an epidemic that led to financial ruin for many.

FDR signs Glass-Steagall Act

The panic in the banking and financial markets caused the Government to step in (sound familiar). In 1933 the Federal Deposit Insurance Corporation (FDIC) was created to insure deposits and stop the panic. The law that created the FDIC was the Glass-Steagall Act. Lesser-known provisions of this act actually played a much greater role in the economic recovery that followed. Some of these provisions were designed to control excess speculation and clearly delineated the roles of banks, insurance companies and investment firms.

For decades the banking, insurance and brokerage industry clamored for the repeal of this act. The brokerage firms wanted to enter the banking and insurance industry and banks and insurance companies wanted to be able to offer stocks, bonds and other investment instruments to their customers. All sides said the competition would benefit the consumer. Various administrations, both Democrat and Republican, had rejected this call for repeal since the 1960s.

Unintended Consequences

There were many that said that the Glass-Steagall provisions were no longer needed and competition would regulate the marketplace. We see now how that has worked out. The increased competition and the thirst for profits ultimately had a lot to do with the housing bubble, foreclosure crisis, failures of major brokerage and insurance giants as well as the current wave of bank failures. The banks, insurance companies and brokerage firms all got what they wished for with the repeal of Glass-Steagall, now they are paying the price.  Ultimately we will all foot the bill for this in some way, shape or form.

There are many in this country that pine for the days of the Clinton administration. They talk of their beloved Bubba as a great multi-tasker who could balance the budget while, at the same time, chasing interns around the Oval Office. They blame the current administration, whose mistakes are too numerous to list, for everything from a hangnail to the current financial mess. But with one stroke of the pen President Clinton repealed the Glass-Steagall Act on November 12, 1999 and may have planted the seeds for a financial crisis of epic proportions. Do you remember where you were?

Leaders are responsible not for running public opinion polls but for the consequences of their actions. -Henry A. Kissinger

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