On the Limits of Presidential Power: FDR and Glass-Steagall

Matt Taibbi, rockstar financial journalist, has a new lengthy piece in Rolling Stone on How Wall Street Killed Financial Reform. I highly recommend the article, which covers strategies used by big banks to fight the implementation of the Dodd-Frank act. But, I also want to quibble with one of the arguments Taibbi – and many others – make about the act’s historical analog, the Glass-Steagall Act of 1933.

Both acts were passed in the wake of major financial crises, by majority parties swept into office by the fallout from those crises. Glass-Steagall famously separated commercial and investment banks, created deposit insurance (the FDIC), and capped interest rates on deposits (Regulation Q), among other things. Dodd-Frank’s goals were more modest, in some ways, but included the Volcker rule which prohibits banks from engaging in proprietary trading (somewhat analogous to the separation of commercial and investment banks) and requirements that derivatives be traded on market exchanges when possible (most derivatives were “over the counter” (OTC) before the act, and thus very difficult to make sense of and regulate). And, indeed, Glass-Steagall was frequently mobilized in the past few years as an explicit marker of what used to be great about American financial regulation and thus what needs to be recovered.

Taibbi mentions Glass-Steagall (GS) as well, in order to argue that Dodd-Frank (DF) started out weaker than GS, and thus was easier for banks to delay and evade. I agree in general, but I want to contest one part of Taibbi’s characterization of the history of GS:

In fact, Obama’s initial response to the devastating financial events of 2008 represented a major departure from the historical precedent his own party had set during the 1930s, when President Franklin D. Roosevelt launched an audacious rewrite of the rules governing the American economy following the Great Crash of 1929.

Upon entering office, FDR was in exactly the same position Obama found himself in after his inauguration in 2009. Then, as now, the American economy was in tatters after the bursting of a massive financial bubble, brought on when speculators borrowed huge sums and gambled on unregistered securities in largely unregulated exchanges. This mania for instant riches led to an explosion of Wall Street fraud and manipulation, creating a mountain of illusory growth divorced from the real-world economy: Of the $50 billion in securities sold in America in the 1920s, half turned out to be worthless.

Roosevelt’s response to all of this was to pass a number of sweeping new laws that focused on a single theme: protecting consumers by forcing the business of Wall Street into the light. The Securities Act of 1933 required all publicly traded companies to register themselves and offer prospectuses to investors; the Securities Exchange Act of 1934 forced publicly traded companies to make regular financial disclosures; and the Commodity Exchange Act of 1936 required all commodities and futures to be traded on organized exchanges. FDR also created the FDIC to protect bank depositors (through an insurance fund paid for by the banks themselves) and passed the Glass-Steagall Act to separate insurance companies, investment banks and commercial banks. Post-New Deal, if you put money in a bank, you knew it was safe, and if you bought stock, you knew what you were buying.

Ok, here’s my problem with this narrative: Roosevelt didn’t do it! Well, FDR did in fact sign each of these laws into existence. But FDR was not the driving force behind them. As co-author Russ Funk and I discuss in our history of the rise and fall of Glass-Steagall (working paper available here), pressure to pass financial regulation preceded FDR taking office. Senator Glass and Representative Steagall were both working on financial reform bills in the early 1930s, without much success. The Pecora commission investigations into Wall St. shenanigans created public outcry and helped push for specific provisions which ended up in the act. FDR, in fact, was on the record against the creation of deposit insurance, as he thought it was an overreach of federal regulation. Here’s how we put it in the paper:

In light of the Pecora Commission’s findings, Congress passed the Banking Act of 1933 in June. The law merged Congressman Steagall’s deposit insurance bill with Senator Glass’s bill separating commercial and investment banking, and thus is commonly known as the GlassSteagall Act of 1933. Roosevelt somewhat reluctantly signed the bill into law; he was concerned that deposit insurance was an overreach, and he had only lukewarm support for the separation of commercial and investment banking (Perkins 1971: 524). Thus, although the Glass-Steagall Act is commonly included in lists of Roosevelt’s New Deal accomplishments, his own role was quite minimal: both major components of the law were proposed before he took office, and Roosevelt simply allowed them to enter into law. (Funk and Hirschman 2012: 20)

Why does it matter that Congress, not FDR, provided the momentum for Glass-Steagall? For one, I think it reminds us of the importance of Congress in making and enforcing the rules. Democrats controlled Congress in 1933 when Glass-Steagall was passed, but they continued to control it well past the law’s implementations – for more than the next decade, in fact. In contrast, Democrats lost control of the House before Dodd-Frank was implemented. As Russ and I describe in our paper, and as political scientists have long known, the process of regulation is a slow and gritty one. New regulations take time to implement, and always have holes. Over time, these holes accumulate as businesses invent new practices and products (one field’s “innovation” is another field’s “policy drift”). Thus, continued control of Congress, and interest by legislators, is required to patch up the gaps, fund regulatory agencies, and so on. The President can’t do that alone.

For another, I think it also reminds us that the presidency has changed in the past 80 years. We tend to read back into history the modern executive, with their immense power. And that’s just bad history. FDR played a not insignificant role in the expansion of federal authority, and of executive power. But that’s a story that continues to present. The more we talk about “FDR did this” and “Obama should do this,” the more we naturalize the current power of the president as an inherent feature of the system. That makes for bad history, and also tends to foreclose discussions of the future. What can wax can also wane.

To reiterate, Taibbi’s article is a fantastic window into the strategies of big banks to stall the implementation of Dodd-Frank and repeal major provisions. And elsewhere, Taibbi does a fantastic job of showing the importance of Congress – for example, reminding us that they control the budget for key regulators like the CFTC. But I think the article would have been slightly stronger with just a bit more attention to the history of Glass-Steagall and the importance of Congress in its passage.

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