Michel Rocard, the Socialist Prime Minister of France 1988-1991, today released a column entitled “Taming Europe’s Banks,” in which he praises the effects of the original 1933 Glass-Steagall Act and implies that such legislation is needed now.
Rocard notes that the European Commission’s banking reform blueprint released last month falls far short of the European Union’s 2012 High-Level Expert Group’s recommendations “which included an impermeable wall between banks’ speculative-trading business and their retail and commercial banking activities.”
Rocard continues, “In 1929, a crisis among speculating capitalists prompted poorly conceived and excessive reactions, leading to a deep and prolonged depression. Less than four years later, U.S. President Franklin D. Roosevelt’s newly elected government passed the Glass-Steagall Act, which prohibited commercial banks from trading securities with clients’ deposits.
“By forbidding investment banks from holding cash deposits, Glass-Steagall helped to support more than a half-century of financial stability after World War II. This—together with the gold exchange standard, which ensured that credit did not exceed the economy’s productive capacity—contributed to sustained global economic growth.
“Everything changed in 1971, when U.S. President Richard Nixon…abolished the dollar’s direct convertibility to gold. The resulting exchange-rate, interest-rate, and commodity-price volatility continues to this day….
“Through all of this, governments have strengthened bank regulation only slightly, leaving key issues like liquidity creation, exposure to derivatives, and tax avoidance largely unaddressed. Today, 98% of the $750 trillion in global liquidity is in speculative markets. Like all bubbles, this one is bound to burst….
“The eurozone’s member states should never again have to face such costs” as it has in the aftermath of 2008.
Rocard’s column appeared on the project-syndicate.org site.