A New Financial Transaction Tax And Glass-Steagall Act: Two Equally Misguided

Progressives have never let go of the notion that the 1933 Glass–Steagall Act outlawed the problems that caused the Great Depression. They have also consistently sought to tax every activity known to man because they feel that profit and wealth accumulation – by people other than themselves – are unjust.

Basing policies on these misguided ideas is dangerous, but the Biden administration appears to be moving in that direction.

Apparently, President Biden sees “eye to eye” with Sen. Elizabeth Warren (D-Mass.) on reimposing some version of Glass-Stegall. Warren’s big idea is to use a new version of Glass-Steagall to start “breaking up the biggest U.S. banks.” Biden also supports a financial transaction tax, and Sen. Warren has just co-sponsored a new bill to implement “a 0.1% tax on each sale of stocks, bonds and derivatives.”

Even some conservatives are now supporting these ideas, but ultimately it doesn’t matter who is advocating for them.  

The only thing that these policies will do to boost living standards is make well-connected lawyers and consultants filthy rich for helping write and navigate all the new rules and regulations. They will shrink – not expand – economic opportunity for the middle class and lower-income workers. Both these ideas are based on flawed logic and distorted history.

Let’s start with Glass-Steagall.

As difficult as it may be to believe, there is virtually no evidence that banks engaged in securities trading prior to the Depression were in worse financial condition than their peers who stuck to retail banking. In fact, the evidence suggests that banks engaged in both types of financial activities were stronger than those that engaged in only retail banking. Incidentally, the evidence is perfectly consistent with basic financial theory – investing all of one’s eggs in a single basket is never a good idea.

True, numerous reports cite many abusive and reckless investment practices that Congress uncovered prior to passing the Glass–Steagall Act. But most of these assertions are exaggerated or untrue. They typically refer to secondary sources rather than the original record, and to opinions and allegations rather than actual evidence of abuses. In many cases, commentators refer to practices that had nothing to do with the combination of investment and commercial banking, such as tax avoidance and “excessive” salaries.

The most recent Glass–Steagall myth is that its repeal (via the 1999 Gramm–Leach–Bliley Act (GLBA)) led to uncontrolled speculation that caused the 2008 financial crisis. But the GLBA repealed only two sections of Glass–Steagall while leaving intact key financial market restrictions from the 1933 law, and the same mortgage investments were allowed under both regulatory regimes.

Furthermore, although the GLBA allowed some firms to engage in activities from which they were previously restricted, those financial activities remained heavily regulated after the law was enacted.

If anything, the Glass-Steagall Act made financial markets less safe, and the blame lies mainly with Sen. Glass. Like many progressives and populists after him, Glass was preoccupied with the notion that “purely speculative” investment activity was harmful and had to be kept out of commercial banks.

They ignore, of course, the fact that commercial lending involves many of the same types of financial…