GLASS-STEAGALL | Bipartisan Support (Updated March 12, 2017)

Sen. Carter Glass, Feb. 1933

July 27, 2016—Andrew Ross Sorkin (New York Times, July 26, p. B1) considers it "an extremely odd political dovetail" that both Democratic and Republican platforms include planks calling for the restoration of the 1933 Banking Act, widely referred to as Glass-Steagall.

The GOP platform is not consistent. It has some anti-regulatory provisions diametrically opposed to a restored Glass-Steagall Act. But a coalition between Republicans and Democrats on major financial issues is not odd at all:

• The coalition that brought down the Philadelphia-based Hamiltonian Second Bank of the United States united Old Republicans opposed to growing Federal power and Jacksonian Democrats opposed to the reining-in of bank lending.
• The coalition that created the Federal Reserve in 1913 included Republican Senator Nelson Aldrich and several Wall Street bankers, who drafted a privately controlled plan at a "duck hunt" in November 1910, and Democratic Congressman Carter Glass of Virginia, who with President Woodrow Wilson added provisions for greater public control.
  
• FDR's Republican Treasury Secretary, the unjustly forgotten Will Woodin, calmed the financial markets in 1933 and got both houses of Congress to agree in a single day to an Emergency Banking Act and then to the 1933 Glass-Steagall Act.

When I was working as a financial economist at the Federal Reserve Board in 1964-66, Bray Hammond's history of banking was still fresh in the minds of researchers there. Hammond had been Assistant Secretary to the Board of Governors of the Federal Reserve System through 1950. He  wrote Banking from the Revolution to the Civil War (key chapter posted here) that won a Pulitzer for history in 1958.

Today's Main Street coalition has coalesced in reaction to the 2008 meltdown. It is broad and deep but it is the same coming-together that has stood the United States well since the Revolution.

Glass-Steagall was named after Sen. Glass, now chairman of the Senate Banking Committee, and Rep. Henry Steagall of Alabama, chairman of the House counterpart committee. Working under pressure from FDR and Woodin, Glass and Steagall fashioned a law that was a powerful bargain. The banks originally got deposit insurance up to $2,500 per account holder from Steagall in return for strict regulations designed by Glass to separate insured from non-insured financial institutions.

Woodin and FDR were both fully aware of the hazard that investment bankers would try to get access to insured deposits to speculate with, which is why they deeply opposed deposit insurance unless accompanied by strong regulation of banks covered by such government-backed insurance.

Deposit insurance coverage was ultimately expanded. Depositors were allowed to have different insured accounts at the same bank (retirement, joint, etc.). Coverage was raised in steps to $40,000 and, in 1980–in a move that the FDIC itself opposed–to $100,000. The increase to $250,000 was in response to the 2008 meltdown and arguably encouraged the same disregard of risk that caused the meltdown. In practice, when a small bank gets into trouble the FDIC arranges a takeover. If the bank is too big the fail or be taken over, the 2008 Lehman takeaway is that the Fed is likely to finance the bank's losses to preserve the financial system.

Meanwhile, while the regulations installed by Carter Glass lasted more than half a century. Their erosion in steps through 1999 in the name of "modernization" paved the way for the 2008 crisis.

COST OF 9/11 | Gulf War II–a Non Sequitur?

New York Times, Sept. 12, 2001.

A New York Times story by Andrew Ross Sorkin published online on Nov. 16, 2015 and in print on Nov. 17 (pp. B1 and B4) estimates the total cost of 9/11 to the USA as potentially "as high as $3.3 trillion."

$3.3 Trillion?

That seemed like a lot to me. The final estimates of the total cost to New York City came in at $70-$80 billion, after the initial estimates of deaths were cut in half and the damage to the hotel next to the World Trade Center was found not to be as bad as feared.

Much of the damage was, of course, paid for by insurance payouts–and, of course, terrorism insurance premiums then soared, or deductibles, or both.

Federal assistance to the City also helped, with $20 billion promised and a good portion of that delivered.

The Basic Costs: Physical and Economic

The total cost is defined as the "economic cost of Sept. 11" to the entire United States. The estimate starts with $178 billion for the physical and economic costs–$55 billion for physical losses and $123 billion for economic losses. These numbers are in the ballpark, although shifting the focus from New York City to the nation cancels out economic costs to NYC that were premised on corporations moving jobs out of New York City (e.g., for New Jersey or Westchester). Many of these jobs came back, but that was not at all the most likely scenario back in 2001 when I worked on these numbers as chief economist for the NYC Comptroller's Office.

These two basic physical and economic cost numbers are relatively easy to understand from examples:

• When buildings are destroyed, America's wealth declines and resources are diverted from the rest of the economy to replace them. 
• When airports are closed all across the United States, the impact on the national economy is also obvious (think about the impact on tourism in Hawaii and Nevada, for example).

Costs of the U.S. Response to 9/11

Sorkin goes on to hike the number from $178 billion to $3.28 trillion, with two other "costs"that are the sum of the consequences of two decisions by the then-President of the United States:

1. To go to war in Iraq ($2.516 trillion). The Second Gulf War began with the President's decision to retaliate against Iraq for building alleged weapons of mass destruction. The decision was controversial at the time and still is. The $2.5 trillion price tag for the second Gulf War may even be a lowball estimate if the United States stays in Iraq and Afghanistan and keeps spending in this arena. Whether one considers the decision war as justified or not, the spending on it cannot be described as an inevitable consequence of 9/11. It was a consequence of how the nation responded.
2. To create the Department of Homeland Security ($589 billion). The new department is a reshuffling of existing agencies. Something had to be done at the Federal level to respond to the failures of intelligence that allowed successful acts of destruction on 9/11. But the size of new domestic security spending grew because of the same controversial information that led to the Second Gulf War. 

These "costs" are real. The numbers are in line with those that Linda Bilmes and Joe Stiglitz put forward as the cost of the Second Gulf War (the beginning of the First Gulf War just celebrated its 25th anniversary). But it is inappropriate to call them the "costs of 9/11". The 9/11 attack may have created a climate that created support in Congress for going to war again in Iraq and overhauling domestic security agencies. But it was not a sufficient cause. It was not a consequence of 9/11 in the same way as destruction of buildings and interruption of economic activity. It was a non sequitur.