NYU Prof.: Glass-Steagall Is What Can Replace Dodd-Frank

One simple discussion of restoring Glass-Steagall and dispensing with the Dodd-Frank Act was published in {Financial News} Nov. 16, by NYU Stern School of Business Prof. Roy C. Smith, and headlined “Welcome Back, Glass-Steagall?”

Professor Smith noted that Trump supports restoring Glass-Steagall, like Sen. Bernie Sanders; but unlike Sanders, wants to do away with Dodd-Frank — and Smith lists a number of reasons Dodd-Frank should be ditched.

“Dodd-Frank would have to be replaced by something,” he wrote.

“Americans are still angry at the banks and distrustful of them. So why not Glass-Steagall? It was simple (only 37 pages long), inexpensive, and provided for stability and safety of the US banking system for 66 years. A Trumpian deal swapping Glass-Steagall for Dodd-Frank, which would also involve breaking up the banks, brilliantly delivers three campaign promises in one stroke.

“Could Trump get such a deal through Congress? Probably.”

(Here even the {Washington Post}, which opposes Glass-Steagall, agrees in a Nov. 18 editorial: “There is no shortage of proposals for doing this [replacing Dodd-Frank]. The Republican platform’s odd call for a restoration of the Depression-era Glass-Steagall Act, would enjoy bipartisan

support…”)

Professor Smith then dismissed attempts to strip away and amend parts of the impossibly complex, 2,300-page Dodd-Frank Act with its 22,000 pages of regulations, as opening an immense can of worms. Thus he dismisses the idea of Trump’s “financial transition coordinator,” former SEC Commissioner Paul Atkins.

Smith wrote, “How would we cope with the re-imposition of Glass-Steagall? The law would have to be modernised (e.g., do securities include government obligations, tradable bank loans and derivatives?) but it could be done. But, only the largest US banks (five or six) would be affected meaningfully. They would have to spin off their investment banking subsidiaries as they did in the 1930s. Most of the banks would object to this strenuously, but at least two of them, Citigroup and Bank of America, longtime too-big-to-manage underperformers trading well below book value, would be better off breaking up. Neither are likely to do so on their own.

“The blunt force of politics is not usually the best way for economic policy to be made, but maybe this time it is.”