Return to Glass-Steagall Says Financial Times Op-Ed
June 12, 2012 • 7:53AM

An op-ed in Monday's Financial Times calls for a return to Glass-Steagall under the title "Why I Was Won Over by Glass-Steagall." This clear and straightforward call was written by Italian Prof. Luigi Zingales at the University of Chicago Booth School of Business. He also writes regularly for the Italian daily Il Sole 24 Ore and the weekly L'Espresso.

After confessing he once opposed Glass-Steagall, living through the last few years has changed his mind, he says. "I have revised my views and I have become convinced of the case for a mandatory separation" of commercial banks from investment banks.

Zingales writes that one key reason for his support for the original FDR legislation is its simplicity, contrasting sharply with "Volcker rule," which unlike the 34 pages of Glass-Steagall, runs some "298 pages of mumbo jumbo, which will require armies of lawyers to interpret." Adding that "The simpler a rule is, the fewer provisions there are and the less it costs to enforce them. The simpler it is, the easier it is for voters to understand and voice their opinions accordingly. Finally, the simpler it is, the more difficult it is for someone with vested interests to get away with distorting some obscure facet."

Another reason is the fact that after the repeal of Glass-Steagall there has been a "demise of public equity markets and an explosion of opaque over-the-counter ones." Furthermore "With the repeal of Glass-Steagall, investment banks exploded in size and so did their market power. As a result, the new financial instruments (such as credit default swaps) developed in an opaque over-the-counter market populated by a few powerful dealers, rather than in a well-regulated and transparent public market."

He concludes that Glass-Steagall "helped restrain the political power of banks. Under the old regime, commercial banks, investment banks and insurance companies had different agendas, so their lobbying efforts tended to offset one another. But after the restrictions ended, the interests of all the major players were aligned. This gave the industry disproportionate power in shaping the political agenda. This excessive power has damaged not only the economy but the financial sector itself. One way to combat this excessive power, if only partially, is to bring Glass-Steagall back."

A senior U.S. intelligence source emphasized the significance of the Zingales op-ed, given that he is an influential figure within the University of Chicago crowd, from where Obama was hatched after he was shipped from Harvard Law School out to Hyde Park. The fact that he was formerly a critic of Glass-Steagall who is now pushing for its reinstatement further adds to the significance of the op-ed.