Picture the 1920’s. The stock market is booming, people are drinking champagne and things are going great. Roads and high-rise developments are being built, speculation is commonplace, people borrow money and pump it into stocks…eventually, the good times end. Glass Steagall could be introduced into Australia, are the big banks, a big risk, no more?

1933 GLASS STEAGALL - BANK RESTRICTIONS - BANKS AND WALL STREET CRASHED THE STOCK MARKET

Big Banks, Big Risk no more?

Apart from the party ending, this sounds remarkably familiar to our current day circumstances here in Australia.

In what could be a return to 1933 scrutiny of the banking system, Glass-Steagall has today been introduced into parliament by Bob Katter to a small and seemingly uninterested house of representatives.

The boom of the 1920’s US era came to a violently disruptive flop on Black Tuesday, October 29, 1929. The stock market crashed 24% in a series of two spectacular days. Following this grandiose meltdown and in the depths of the Great Depression of 1933, the Glass-Steagall Regulatory Act was introduced.  This came about after the US Congress commissioned a study into what caused the great depression. Two Senators – Glass and Steagall were sponsors of the study.  Their conclusion was that banks speculated too much, and lent and borrowed in excess. But it was not just the banks deemed to be at fault – the study also blamed Wall Street for their part in the wild financial speculation. 

The Glass-Steagall Legislation recommended that the banks and Wall Street be split, and a firewall is placed between them so that Wall Street could speculate all they want. This would ensure that in the worst case scenario, Wall Street could burn to the ground and the commercial banks would remain unaffected.

The legislation put a stop to banks participation in speculative and flirty behaviour with questionable or risky investments. Banks could only provide banking activity from then on – banking, loans, and savings. 

Fast forward to 1999

Again the stock market is going strong. Movers are moving and the shakers are shaking. Even though growth is abundant, the Banks and Wall Street want more, but where could they get it? The answer – each other.  Wall Street and the banks wanted a piece of each other’s growth, so both strongly lobbied Congress to get rid of the Glass-Steagall Act – and things have never quite been the same since. More booms and more busts than any prior period.

Stock Market Index Chart

So why is this piece of Banking History worthy of a revisit?

It is a heady mix when banks and investors collaborate together to maximise risk in the name of profit, and as outlined by the Banking Royal Commission, can we trust the banks to act in the best interest of depositors like you and me? Questionable at best.

Glass Steagall Australia – on the cards?

Today’s introduction of the Banking System Reform (Separation of Banks) Bill 2018 into the Australian Parliament is the Australian version of the 1933 US Glass-Steagall Act. This Bill will separate commercial and investment banking, but it may also plant the seed for further scrutiny of the Australian Banking system straight off the back of the recent Banking Royal Commission.

Watch this space.

 

 

Stock Market Crash?