You know that a system is completely out of whack when a former executive of Goldman Sachs tells Congress to reinstate a law that would potentially lessen profits for the same investment bank he used to work for. But that is exactly what Trump adviser and the former COO of Goldman did on March 5 when he held a private meeting with the Senate Banking Committee to push ahead with the means to break up the too big to fail banks.
Speaking from a pragmatic view that the system worked much better when commercial and investment banking was separated, Gary Cohn told the Senate committee that a re-institution of Glass-Steagall was necessary to force banks to once again focus on lending to businesses to help build the general economy.
According to Bloomberg, Cohn said he generally favors banking going back to how it was “when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans.”
What Cohn may not have mentioned is that with rates as low as they are, issuing loans – i.e., profiting from the Net Interest Margin spread – remains far less profitable than trading and underwriting securities in a world in which virtually every “developed world” central banker is either directly spawned from Goldman, or is advised by an ex-Goldman employee,
The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.
Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades. – Zerohedge
Glass-Steagall was one of the most important reforms to come out of the Great Depression, and in the aftermath of the wild speculation that led to the stock market crash of 1929. And as we have seen primarily since it was removed back in the late 90’s under then President Bill Clinton, small business lending as well as lending to industry has fallen off a cliff as banks sought profits through derivative trading and market speculation.
If President Trump wants to succeed in rebuilding the American economy, he first must deal with tax reform and other reforms that change the way banks function in the financial system. And at the heart of this is separating commercial and investment banking, and the only way this will happen is to cut off the mechanism that allowed banks to become ‘too big to fail’ to begin with.
Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.com, Roguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.