Leading Economist: ‘Better If We Had Glass-Steagall System, than the Volcker Rule’

University of Chicago Booth School economist Dr. Luigi Zingales presented a strong case for scrapping the Volcker Rule and restoring Glass-Steagall, to yesterday’s second session of the Minneapolis Federal Reserve Bank’s series on “Ending Too Big To Fail.” Zingales was the luncheon speaker, and his 25-minute presentation provoked much more controversy and attempted “push-back” from the Fed/IMF/economist audience, than had the two-hour morning panel.

The noted conservative economist stated bluntly that the Volcker Rule of the Dodd-Frank Act is not implementable, and that those who promoted it in 2010 knew, and wanted that; and also knew that “the public wanted Glass-Steagall.”

This was one of five reasons Dr. Zingales presented for Glass-Steagall restoration, but had the most force. He said that all sorts of schemes for financial stability which are “better than Glass-Steagall” can be designed; the Volcker Rule is just one of them. But they all are too complex to implement, are not redundant in protection, lack history of effectiveness and therefore public support, and can be picked apart by financial interests to undermine the whole system. [Many listeners may have thought of Hillary Clinton at that point.]

Zingales noted that Glass-Steagall reduced banks’ political power, fragmenting their interests and power. After Glass-Steagall’s demise, financial firms all pushed the same interests and were much more powerful, as evidenced in the disastrous 2005 reform of U.S. bankruptcy law, which elevated derivatives and credit card debt to inviolate priority status.

He also said that Glass-Steagall demonstrably promoted the development of U.S. equity (stock) markets; eliminating Glass-Steagall immediately promoted the hegemony of securities/derivatives/repo markets with “OTC” characteristics. These are increased leverage, fewer permitted players and less competition, opaqueness, and increased profits for financial firms.

Finally, Zingales cited “the alcohol rule.” His mother never used any disinfectant other than alcohol, he said, so that she could tell it was working by her children’s reaction. “The banks being regulated should scream,” he said, “or it isn’t working.”