Learning the Effects of Glass-Steagall Act to National Economy
The Glass-Steagall Act was adapted in 1933 as method of preventing financial loss of consumers through bad business decisions of banks. By the time it was signed into law, USA is experiencing one of its worst economic situations. The Great Depression of the late 20s and early 30s have caused massive unemployment that was considered a reactionary law.
But even though the bill was made into law only as a response to the financial problems of its time, it became one of the most talked about economic laws. The law was repealed in 1999 but a revamped version is already approved that adapts to current economic setting.
Separation for Consumer Protection
The Glass-Steagall Act of 1933 is actually pretty simple. Through this bill, commercial banking activities were identified with investment banking activities. There are times that a commercial bank would have to invest the depositor’s bank in order to gain interest and earn. This setting sound like a good proposition from banks since it can help the customer’s grow. But the investment side of the banks before the Glass-Steagall Act was a bit reckless. Simply put, the investment method used by banks does not have any insurance that will cushion the blow in case of mismanagement. Before Glass-Steagall Act, banks could freely use the funds deposited for investment. If the venture fails, the bank simply informs their client that their investment is no longer working.
The Glass-Steagall Act prevents this disaster from happening by creating a limitation on commercial banking and investment banking. Through this act, deposits made for personal reasons will no longer be touched by any banker that would go into venture. Consumers are completely protected from any mishaps made by their banks.
Backlash and Effects
The effect of Glass-Steagall Act of 1933 has two perspectives. The first perspective is from the point of view from banking institution. For bankers, this decision is a huge blow in the industry. The result of this decision is the prevention of growth of the industry. Since there are limited sources for investment, diversifying portfolio could be very challenging. The second perspective is from the consumers. Advocates of the Glass-Steagall Act argue that the ultimate reason for the bill is consumer protection and it has easily achieved its goal.
However, some experts believe that the goal of consumer protection is simply “band-aid” remedy. Lawmakers should concentrate on reducing risk in behalf of the consumers so that they can be encouraged to diversify their portfolio. This is not only beneficial to consumers but also to the national economy.
But history shows that the Glass-Steagall Act stayed for decades and it was only repealed in 1999 only to be reenacted in 2010.
Establishment of the FDIC
Before looking at the reenacted Glass-Steagall Act, another milestone that came with the law is the establishment of FDIC or the Federal Deposit Insurance Corporation. Its role is to provide insurance to banks so that depositors will be provided with full protection. They also review the capabilities of banks in behalf of the consumers and could take over if the bank fails to do their expected functions. The FDIC was also created to ensure banks differentiate banking practices in order to identify commercial and investment banking.
Before 2006, there are two sources of insurance funds for FDIC: The Bank Insurance Fund or BIF and the Savings Association Insurance Fund or SAIF. Both sources were merged in 2006 and became the Deposit Insurance Fund or DIF. This was established with the enactment of the Federal Deposit Insurance Reform Act of 2005.
When FDIC was established, the insurance limit is only at $2,500. As of this writing, the insurance limit is now at $250,000. The amount was enforced in 2008 to deal with the financial crises and increase consumer coverage. Before 2008, the FDIC only covered $100,000 which was enacted in 1980.
Aside from being a consumer advocate agency, the FDIC also provides updated information of their investigations to the public. The official website of FDIC provides the latest information on banks that are currently struggling and to consumers who wants to know on the state of their accounts when their banks were dissolved.
The New Glass-Steagall Act
On July 21, 2010 President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although it doesn’t say anything about the Glass-Steagall Act of 1933, its gist and events are the same. This law was made in response to the recession taking place and the law is basically a protection of consumer’s deposits. The only difference is that it is further expanded to deal with current economic conditions. Response to this act was also mixed as this financial regulation reform could cause problems in the long run or the reforms proposed are not enough as the deregulation from the previous administrations requires stronger financial reform.