whether to split commercial

Bill Fleckenstein is the author of Greenspan’s
Bubbles and a vocal critic of the decision to repeal
the Act: “Greenspan advocated the deregulation
of the financial system, including the dismantling of
the Glass-Steagall Act whereby investment banks,
commercial banks were separated. That helped
lead to where we wound up in 2008. He pursued
an irresponsible path when it came to monetary
policy. He then advocated that people pursue reckless
investment strategies whether it be stocks
or real estate. It’s not possible to exaggerate the
damage done by Greenspan and the Greenspan
Fed in helping create this mess.
“I believe we need to go back more towards
what we had before Glass-Steagall was repealed;
we should have commercial banks and we can
have investment banks. There’s no reason for the
two of them to be mixed together. That way people
that invest in investment banks, or lend money to
them, know that there’s no potential for a safety
net and the market will discipline them. And then
that way if an investment bank goes under it’s
not going to drag the whole financial institutions
system under. If we’re going to make new laws we
have to separate these two functions and not create
a situation where any one or two institutions
can create so much havoc that they can disrupt
the entire financial system.

Angela Knight is head of the British Bankers
Association and is firmly opposed to any separation
of these functions: “I don’t agree with splitting
up actually. People say investment banking was
higher risk and that’s why it shouldn’t be associated
with ordinary banking. But it’s the ordinary
simple banking that has caused more problems
around the world, and we still see larger numbers
of banks in difficulty in the US which have had the
simple business model than we do investment
banks. People say it’s investment banks that cause
the risk and, yes, some have but by no means all.
So the second question is what are the benefits
and what are the downsides of a universal banking
model? Well firstly the reason a universal banking
model has grown up is because you have customers
who want universal services.
“Now you could split them up and what would be
the results? The answer would be that services
and facilities would be still there but they would be
more fragmented and more expensive. And so I
think we have to look at all sides of the question.
“We can say we want to split up universal banks.
If we did that Britain would probably be the only
country that would do that, where you didn’t have
a one stop shop for the large entities that wanted
it. And we would be providing more expensive
services as a result. There has to be a balance.”