Finally, an important public commission -- the Financial Crisis Inquiry Commission -- which was formed nine months ago to investigate the causes of the financial crisis -- is meeting in Washington on Wednesday and Thursday. This comes just in time to not influence financial-regulation legislation. I welcome the hearings but lament that the Commission is understaffed and underpowered.
You -- yes you, ordinary citizen! -- can submit questions for the CEOs scheduled to appear: Lloyd Blankfein of Goldman Sachs; Jamie Dimon of JPMorgan Chase; John Mack of Morgan Stanley; and Brian Moynihan of Bank of America. What would you like to ask them? (When I asked a friend of mine, he blurted out “Where the f**k is all of my money?”, but the staff probably won’t allow that.)
The new commission should follow the example of a Depression-era commission that investigated the Crash of 1929, which came to be called the Pecora Commission. It produced over 12,000 pages of testimony. The truth it revealed about Wall Street operations galvanized public support for creating the SEC and the Glass-Steagall Banking Act of 1933, which separated commercial and investment banking, reducing the risk that ordinary banking funds would be swept into a wave of speculation and financial crisis.
Glass Steagall was the law for over 60 years, until it was repealed during the Clinton Administration, by an alliance of conservatives like Phil Gramm, and Clinton advisers Robert Rubin and Larry Summers, who is now Obama’s top economic adviser. They supported free-market financial innovation, arguing that free markets could regulate themselves. We learned one important lesson in 2008-2009. They can’t.
An organization -- Shareowners Education Network (disclosure -- I am on the board) -- has proposed a 10-item reform of the financial system. Chief among them is to separate out insured bank deposits from other investment funds so that the banking system can return to its basic role -- to connect up savers with investors: businesses and responsible home buyers. This also would help prevent irresponsible financial speculation and the runaway growth of risky institutions, backed in effect by government insurance, which was one of the major causes of the current crisis.
The irony is that 78 years after the Pecora hearings one of the best things we can hope for is that the new commission would reinvent the wheel, and recommend the same reform, a Glass Steagall 2.0. Let’s separate ordinary banking from investment banking. When investors use other people’s money insured by the government they take too many risks, because they get the gains, but the rest of us pay for the losses. Let them succeed or fail with their money, not ours. And when they fail, it won’t put the rest of us, and our whole economy, at risk.