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tv   Matthew Fink The Unlikely Reformer  CSPAN  August 16, 2019 5:18am-6:50am EDT

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good afternoon. good afternoon and welcome to the american enterprise institute. i am a resident scholar and financial service organizer of today's event.
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this afternoon i'm pleased to host matthew to discuss his new biography one of the most influential politicians of his time in an architect of key legislation that shaped the american financial system. carter glass was born in 1858 in lynchburg virginia and grew up in the reconstruction south. the philosophy on the role of government was shaped by it the views of thomas jefferson a fellow virgin and born just 70 miles north of the virgin upon. from 1903 until the early 1940s, carter glass played a key role in every important financial legislative debate. his colleagues in the house and later in the senate, both the democrat and therefore can recognized glass is to go to expert when it cam comes to bang issues. carter glass was a politician meaning he was an expert when it came to reading the political tea leaves and crafting compromises that could be passed
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into law. never an ideologue is willing to empower the federal government is in his judgment, circumstances warranted. while not a principled progressive, he shepherded the most important progressive reforms through to the senate. carter glass had his fault. he could be grumpy, but mostly in private. he wasn't a proponent of racial equal to the end of that is putting it mildly, and he was a democrat. that was a joke. times were differenthe times wen and his conservative and legislation would probably be out of place in today's government party. after serving more than 35 years in the house and as the secretary of treasury and in the senate he sat for an interview with the tools of tribune and in the interview, he's quoted as saying effective in the way that i felt i should end with the people decide for themselves if they approved of my actions. i never considered what effect my actions would have upon my
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public career. i've done what i thought was best for the country. we could make use of the politicians have acted like that today. in his new biography, he does a tremendous job of recounting the lifetimes and accomplishment ofr this outstanding and colorful space. in the end, i came to believe that the polls of tribune ring true. i'm now happy to introduce the featured author. before he became a celebrated author, he worked out the investment company institute, the national association. he not only worked there from 1971 to 2004, he was the president of the institution from 1991 to 2004 and is directed at ththedirector of thr mutual fund and member of the investment company' companies ce and director of the retirement income industry association. he's authored several articles on the mutual fund industry and
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the rise of mutual funds and insiders view published by oxford university press in 2 208 was such a success it went on to the second edition and was updated to cover the 2008 financial crisis. an undergraduate from brown university harvard law school, and like mick jagger he also attended the school of economics. please join me in welcoming matthew fink. [applause] >> thanks so much for having me. i see friends from all parts of my life here. it's amazing. i started the book on glass because i kept running into him in my career when i joined the investment company institute that represent its mutual fund account they were regulated by 80 sec and then i asked
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everybody where did the fcc come from and it was a roosevel whatw deal reform agency. i did a little research. roosevelt opposed the creation and it was carter glass got it into someone and so forth so i was interested. the six years agabout six yearsd doing research and found it was before interesting than just the things he had done because there is a paradox and that is why my book is entitled the unlikely reformer, because generally he was a racist and highly conservative reactionary. he made his fame in virginia the turn-of-the-century getting in the virginia constitution amended to the 95%. it was a hard thing to do and he did it and stayed that way his whole life. very conservative, he opposed it
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with the leading democratic opponent of the new deal. he had an 80% anti-new deal record that he was a democrat. and his personal life a as you alluded to, he also was a reactionary, hated the modern age, the perfect curmudgeon or stuffy old man or whatever the angry old man, grumpy old man. he grew up with forces and when the automobile came he wanted to go back to horses. the senate a telephone system when you call the operator and give the number and it switched to dial phones and he insisted that he go back to operators, so it went back. ..
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>> the glass-steagall act of 1933 and portions of this sec act of 1934. now that is a paradox know i will give you the conclusion of me in my research and thinking and writing the three points number one he generally opposed any federal action. number two he made an exception when it occurred with wall street. number three he did not believe the way to address wall street was a regulation
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because like brandeis and others thought regulation always failed and never worked so he believed in breaking up concentrations of financial and political power. those of the three main points. born right before the civil war and had to quit at age 14 he read shakespeare the ancient poets like lincoln was self educated and very well-educated. he started to sell newspapers on the corner and then became a printer's assistant and a reporter for the paper than an editor that the editor when the owner wanted to sell it he arranged it so he could buy it.
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given the state that drafted very well a very successful businessman in the context of reconstruction devastated south. so he went into politics but there is only one party to join, the democratic party. he made his fame as a virginia senator coming up with a way to amend the constitution to deprive all blacks of the right to vote and that made him a hero to white virginia so a 19 oh two he was elected to the united states congress. that is at a time when the republicans dominate the federal government largely since the civil war teddy roosevelt in the white house and the young democrat was very much of a nonentity.
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elected on the foreign relations committee but instead they stick him on the banking committee for go there had not been a major banking bill since a national banking act passed during the civil war so he is sent to a no man's land but being very bright and studios want a studious he reads everything he can about banking and finance and becomes an expert with anybody knows that i don't know but he read everything. 's at that time the only major industrial country that did not have a central bank to manage the currency and fighter panic. nobody thought about it. there were a few professors and reformers that said we should have a national bank but things are going along pretty well republicans who
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control the government wasn't too interested teddy roosevelt found banking boring so nobody paid attention that we have a major panic in 19 oh seven the biggest cup until 1929 banks failed left and right insurance companies or threatened brokerage firms are about to go down the new york stock exchange is threatened with no federal or state authority to address the panic. it is addressed by jp morgan who controlled an investment firm and then he goes around to his buddies and puts together rescue packages on the voluntary basis to bailout those institutions that we get through that now people in washington say maybe we do need a central bank we haven't had one in this crisis shows
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morgan will not be here forever. so republicans who are in firm control named the most powerful republican senator nelson aldrich of rhode island. very powerful i cannot think of a comparable person today maybe lyndon johnson but very strong. he has developed the republican version of a central bank. he consults the committees and hire experts like all over the us and europe meet with english central bankers and the french bankers and as you read about it it looks like they have forever thinking they would be in power for the next 100 years so there was no rush 1911 he introduces a plan calling for a national bank a
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very powerful national bank, a single bank and it was to be owned and run by private bankers and private banks a typical conservative old-fashioned good old republican bank. in 19 oh eight or 1910 he would have been the hero but he waited too long. he missed an opportunity because because of populism in the country democrats take the house in november 1810 so in 1911 the bill comes out in the democrats and liberal republicans have no interest in the aldrich plan the pinnacle of central banking dies. the democrats are in control they have to name somebody to come up with their version and glass is the only guy in the
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whole congress that knows anything about banking so they pick him to draft the democratic version of a central bank. and he comes up with something that very few people had ever thought about but he comes to it pretty quickly he does not want a single central bank in new york but several reserve banks in different cities around the country so those reserve banks will help the local banks who help the local economy and local merchants. it is a big country we just don't want all the money to go to new york he wants to centralize blood - - decentralize the system. wilson is elected president he has to come up with this before he even knows who the president will be that famous three-way election of taft then-president and wilson and roosevelt comes back from the
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new progressive party so when glass comes out with a plan to a decentralized reserve system he doesn't know who the president will be it turns out it is wilson so he meets with wilson and they love each other. they never met each other but they're both racist they both don't like a powerful government both jeffersonian's but yet reformers and wilson loves his plan it's right up his alley. over time he makes a few changes. the two big ones that he had the reserve banks he would give them control of the currency to make sure they were coordinated. wilson says the control is too busy why don't we trade board and altruistic board of people who will oversee the system the federal reserve board. and also the governors of the
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federal reserve board that most will be chosen by the president and approved by the senate. but if you will be picked by the private bankers and wilson and bright brand i said no private bank control it's only chosen by the president. so that is the federal reserve act that glass comes out with. it morphs into a giant political tangle of monumental proportions. first of all the republicans hate it because they want a strong central bank like the aldrich plan this is a screw weed democratic populist with hate coming out of his ears with a centralized system and then the radical democrats from the midwest largely don't want any kind of bank for go all banks are evil that's why the cover of my book has a cartoon so he is hit from the left and the right plus everybody wants to get into
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the act the treasury secretary of state william jennings brya bryan, brandeis at wilson's advisor and glass find themselves negotiating with the big-city bank or small country bankers he makes 100 compromises below of the hold he gets the bill through the house of representatives and now goes to the senate glass gets it through the senate. so we end up in 1913 christmas day wilson signing the federal reserve act using the decentralized system that glass came up with. this is the first illustration of glass not liking regulation or fragmentation he doesn't want one powerful central bank but a series to end up with 12 reserve banks now he's a national figure to the few
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people who care about this wilson names him secretary of treasury and then he's name to the seat and he's elected former times to the senate so now he is a senator of great accomplishment and people think a lot of him. now in the 19 twenties in the late twenties we have a roaring stock market fueled largely by people buying securities on margin. no federal or state limits on how much a bank it on - - a big could lead then typically they bought stock with 20 percent down $10000 with $2000. this was terrific when the market is going up like 27 through 29 terrific leverage on the upside. not remember the banking
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committee looks at things and sees that is a river of gold according to wall street the banks around the country in wichita kansas or sacramento california are not lending to local merchants and farmers earning 5 percent but thinks - - banks in new york because then they can get 8 percent and then they let that to merrill lynch who lends that to my wife and grandfather and uncle to be marginalized so it pours across the country to local banks using deposits and other funds to lend to the new york brokers. glass is outraged and digs deeper and it gets worse these 12 reserve banks are lending to the banks and their areas to lend it to the new york city banks to lend it to merrill lynch and the reserve
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banks are buying the paper that the commercial banks in the cities so now they are funding the huge flow of money to wall street. there was a system and created to decentralized to have the local economy supported is now a mechanism to get money to the countryside to wall street and he is outraged he writes editorials and gets to the floor of the senate and above all goes to the federal reserve board which he had created and said this is outrageous this is not why the system was created. you have power stop it. the fed says we will think about it. good point basically does nothing. glass gets more and more outraged and he becomes a stick in the side to the fed
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and the banking industry because he is out there alone screaming that this is happening so they get a professor at princeton to write a book called wall street and washington published may 1929 saying the stock market is terrific and very efficient. it's making a great economy and the state of the economy like darwin and publishes may of 29. then to add insult to injury that is the home of woodrow wilson so he really gets dissed but now we know what happens a couple months later october is a huge stock market crash my wife grandfather and my uncle all get wiped out along with people across the
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country people were allegedly jumping out of skyscrapers and people said by god that idiot was right. he predicted this. the senate was still lopsided the controlled by republicans in 1929 and guess who they pick to run a committee to look into this and come up with legislations that won't happen again? the democrat glass out of this is ever happened in history but one party selects somebody else very deeply in the other party for a subcommittee now he has a subcommittee to develop the glass-steagall act we know it for other reasons but the main goal is to prevent the federal reserve banks from lending for speculation to limit how much commercial banks can lend for speculation doing so with the first draft of the bill at that time he was ready to go
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home. he addressed his main concern but two other things happen now looking back that overshadow that. first was fdic. in the late twenties and early thirties five or 6000 banks fail around the country. mostly rural agricultural states in the midwest local banks are lending to farmers a big agriculture depression and there is a public outcry for the federal government to ensure deposits from those depositors that got wiped out also the local communities there's no source of money anymore and also from federal bankers and they all demand federal deposit insurance so everybody in the country thinks it's the worst idea ever president hoove
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hoover, glass, people on the federal reserve board people at the big banks they think it is a crazy system to have all the powerful well-run banks pay premiums to shore up badly managed small banks that could go out of business. but there is a tidal wave as the depression gets worse and worse of public demand and glass hates the idea. but he learns unless he puts it in the bill he will not get the bill to restrict lending for speculation so reluctantly he puts deposit insurance in his bill. so third, what we all think about is anything anybody thinks of the banks being in the securities business. it is technical but the beginning of the 20th
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century large commercial banks in new york mostly citibank want to get into securities underwriting. but the lawyers look at the national banking act law passed that says national banks can do and it doesn't say you can do security so they cannot do it. but they are small lawyers so they come up with a sister company called a securities affiliate and tie that to the bank to have the same officers and directors as the bank and have for 300 shares of citibank or chase manhattan and if you turn in your certificate now you will evidence ownership of the bank and the security affiliate so they are a big thing in the twenties using this device and
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they are the biggest security firms in the country. 1929 the largest securities firm is citibank where citibank could only operate in new york state because they did not have cross banking and then it goes gangbusters and goes through charlie mitchell so it's a big deal. and the question comes up what to do about the security affiliates. glasses first bill said they ought to be regulated affiliates of national bank with the currency security affiliates of state banks should be regulated by the federal reserve board. but the next bill a year or so later moves way beyond regulation to the abolition of
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security affiliates. i thought i would do years of research and i have a dozen and i'm not sure which but first of all glass was around 1913 when he was appointed to run the subcommittee to draft the federal reserve act the same time the democrats were trying to make a committee with the money trust coming out with recommendations to outlaw security affiliates. so they looked at this 20 years before they started by outlawing them. second glasses first proposal is to have the fed in control or regulate but he doesn't have much faith in regulation coming from a period where he yelled and met and screamed at the fed to do something about speculation and they blew him off so he is not enamored with regulation.
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third, when he held his hearings the federal reserve board testified in glass said mister chairman what should we do about securities well they are a problem if we could do it all over again but it's hard to unscramble the omelette but here is a piece of paper that has legislative language to abolish them if that's what you want to do so now by the fed itself it's indicating he doesn't have faith that much regulation so now two things happen that push it over the line. rightist glasses having the hearing of major bank fails it's not one of the big well-known banks it's a bank for immigrants in the government business and fail spectacularly tens of thousands of new yorkers were
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left without deposits for go run by two semi crooks and it has 59 affiliates mostly in real estate but now all of a sudden in the middle of the hearings thinking about what to do this gigantic institution fails in the biggest city in the country with a budget of affiliates. the second thing that happens in responses the new york state superintendent of banking introduces legislation in the new york legislature to prove her a bit - - prohibit now to have affiliates now is not just a theory 20 years before now the legislation the most important financial state in the union is calling for abolishing security affiliates so this is why glass moves to separation of abolishment rather than regulation.
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that is a glass-steagall act and limits for prohibitions for speculation fdic and to make it clear not only in the securities business but not only can have affiliates roosevelt defended a glass the same way or he handed the drafted to wilson president roosevelt is elected and glass hands him the glass-steagall act. mostly done and it is enacted in the first 100 days of the new deal. but what is reflected is the idea of regulation is not the way to address financial problem problems, fragmentation, decentn so they try to regulate those affiliates and separate banks and securities firms. but there is one more act to discuss the sec act of 1934
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way back in that committee in 19131 was to require somebody issuing new securities the second was to regulate the stock exchange and brokers. guess who they had as the regulatory authority? because they are very concerned about jurisdiction and the constitution gives federal government to regulate so nothing happens to the recommendations 20 years later roosevelt is elected the new deal comes in a turn to securities regulation first the securities act with disclosure and then they have a big debate on the roosevelt people select the ftc for cohen agency created in the
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wilson administration to impact liberal reformers but that's what they pick. now we have 34 which is the harder issue a stock exchange and broker regulation and then they come out and say here's what we want to do to regulate the stock exchange and stock broker-dealers and me will give you the same agency. the new york stock exchange was much more powerful it is the single but very socially politically with the liberals of the ftc to regulate the whole new york stock exchange. and those to give jurisdiction
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to the ftc and margin authorities to have standards to go crazy. so now he steps in and proposes a new agency of the ftc to give it authority to deal with margin. glass does this because he does not like a large agency doing many things. he wants a specialized security agency rather than one that does 20 other things doesn't want the fed to have anything to do with the stock market or the margin. so the sec to regulate the stock exchange brokers and they violently oppose it and it's a showdown in the senate banking committee.
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this is 1934 the height of roosevelt and new deal powers it's a beat ten / eight they vote to create a new agency , the sec then the margin goes to the fed and then the beats roosevelt the height of the new deal. and now the federal reserve act they obviously have been amended over time. and largely in place today. and they are largely in place today. the federal reserve act
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amended 1935 to give the board power that is a movement at a decentralized system and in the open market committee to decide interest rates and those from the regional banks is a decentralized system. >> and now with the sec any administration democrat liberal conservative that is rolled up into a larger agency and 100 proposals that have never gotten anywhere this is
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a small specialized securities agency the changes of the glass-steagall act is the fed ruling of congress in 1999 showed get rid of prohibition on affiliates congress blessed the feds attempts then to get back in the securities business with securities affiliates. all other provisions are in place for go banks are limited for speculation federal reserve banks can't lead for speculation they can't take deposits we still have deposit insurance a most remains. . . . . in government or business or
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anyplace else, he followed. so, a lot of people in addition, but he was without a gun. they gave speeches, wrote opinions, but he got three laws enacted. since the second world war, we abandoned this approach and in the regulation approach more and more imposing more and more regulations. the hard plaintiff dodd frank act, which came after the 2008 financial crisis, which is a regulator's dream. ththe act is 848 pages and requires tw to adopt hundred 43w rules to undertake major new studies and prepare 22 reports
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so if you lack regulation that is what is off the menu. third, despite this, there is a widespread belief that dodd frank is not going to stop assaulting another financial crisis. my book is full of quotes from people all over the map saying that cometh to former and her general said, quote, we had a system that was broken and the fundamentals have not changed. the question isn't if it raises another financial disaster but when. on top of this, for whatever reason we have fewer banks with more deposits, fewer concentrations of today you've seen recently the last couple of years politicians like john mccain, sanders, warren calling for the restoration, some people call for stronger stuff not just to separate banks and securities but banks from asset managers, pension matters and finally
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impose a limit on the size of banks for example no more than 3% of u.s. deposits. the last thing i will say i have no doubt we'll hear more about t this as the 28 candidates keep going and if there ever is a financial crisis of any sort, this is going to come out of the medicine cabinet cabinet so thet thing i will say they are still with us today, and i think that it was faulkner and others who said the past is never dead, it isn't even th past. thank you. [applause] like his classmates is a hard act to follow. we tothe two have expert discuss today. speaking in alphabetical order
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will be wayne abernathy who joined the american bankers association in february, 2005 and serves as the executive vice president for financial institutions policy and regulatory affairs. before joining, mr. abernathy served as two years as the treasury assistant secretary for financial institutions under president george w. bush and received the alexander hamilton award in recognition for service. prior to his work in the treasury, he served as a staff director of the senate banking committee under senator phil gramm who was one of the authors of the gramm leach bliley act. here in a masters degree down down the street at the international studies school of advanced international studies at johns hopkins. speaking second is the professor oprofessorof law at george washn university who joined the
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faculty in 1986 after 11 years of private law practice including as a partner at jones and is the author of more than 40 law review articles and book chapters in the banking law and american constitutional history and is the coeditor of the book on the financial crisis of 2008. in 2005 the college of consumer financial service lawyers awarded a prize for the best review article. i could go on and on, but i won't. you can read about it online. he testified before congress many times it is a consultant to the financial inquiry commission that looked into the financial crisis. he has a ba from yale university and a law degree from harvard law school. so, both of our experts here, thank you for coming and the microphone is yours.
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>> it is a pleasure to be with you this evening. this is an important issue because it is an important book. it's a good book it is a fun book and interesting to read, which is unusual. let's say i want to write a book about someone involved in financial legislation, usa with me know how that goes. but it's actually a very interesting and enjoyable book. and this biography is so enjoyable because unlike many biographies of financial or others come it doesn't paint a two-dimensional person coming up to since carter glass in a very three dimensional way, which i think also makes it difficult to put a label on him and he's a very interesting person and
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multidimensional person. second reason why this book is very interesting is because it is a great study in the legislative process in. you learn a lot about how to make the law looking at the way that he was involved with it. and it supports my own conclusion when based upon looking at the financial system up close it's hard, you've got to really work at it to make financial legislation partisan, it naturally tends towards bipartisanship and even when others try to go forward with a democrat approach the republicans tried their approach in the end you end up with legislation that is strongly bipartisan and in each of these pieces he was involved with and the therapies and i woul third t
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is interesting, he was deeply involved in many significant pieces of financial legislation for a very important reason. he was willing to be involved. which reminds me of the semester i worked for, senator phil gramm who is known to have said in washington if you've are willing to take on the tough issues, people will stand aside and push you to the front and that was the case, he would take on these type things because nobody else wanted to get involved. if i could, i would add a fourth point. this book relies on how and the fourth point that relies upon what happened afterwards and that is despite the policy intentions and hard work, things didn't turn out quite the way that he envisioned or wanted and that is a lesson to be learned by all who would be involved in
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policymaking. much of the story comes together in the depression. perhaps it is the climax of the plot of the book if you will. oppression is a real-world dystopia. the dystopia of the market recession intensified and prolonged by the search for utopia or application of utopian ideas. the foundation was that the government planners were smarter than the market, yet they were ignoring hoignoring how what the doing and what they were planning to do was stifling the market recovery and making sure what would have been a recession and quick recovery prolonged for a decade. carter glass played a well-intentioned role in that. what is told in this biography, he sought to legislate in accordance with the your beliefs, with a desire to solve
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what he saw as real problems. to do that, he enlisted successful legislators get to know them when and how to make a compromise that brought people together enough to pass legislation surrendering some details however price they might have been, accepting others might not have been favored with a one-off showstoppers and did this to achieve his overall purpose of what he was trying to accomplish an and legislation. as pointed out in the book, he combined technical mastery of complex thinking issues, political acumen and fierce determination to achieve a series of legislative victories in the financial arena and that is very true. he understood the child and the process of legislating, which is becoming a dying art at least in the congress that has been riots in the last ten years or so and that is based upon having worked there a long time and seeing it operate differently.
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legislatures are based on the recognition that no one person knows it all and multiple viewpoints have to be brought together and accommodated to some degree if you're eve you ar going to pass anything. and that is a showing o the shoa master legislator he brought forth the securities exchange act. i want to turn at this point to the word from 100 years ago and that led to the federal reserve act. it arrived as was talked about from the financial panic of 1907. and early proposals were led by senator nelson of rhode island as pointehas pointed out, and ia congressman of new york which related the disquiet of the congressman at the time.
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the emergency act became the subject of the first policy speech carper last days o gave e floor of the house. because it focused on what was then called currency elasticity but only focused on coming up with solutions in the time of emergencies, he felt it needed to be more available and compared to two. i've lost that which everybody praises but nobody read. they were sure that was true of their legislation, i think that is true of the act 20 forward and a bit of foreshadowing i would note that not only was applied to the act but it's a characterization applied to many who would invoke that in today's discussions as well. when i hear calls for 21st great
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glass-steagall acts i rarely hear anybody that understands in fact what it did, how it would functionally apply in the modern economy, and what problems it would actually solve. the 1912 election put together as was mentioned virginia, wilson and glass to bring about the act of 1913. the fact that more and less than wanted but had the structure was discussed about creating something that you don't find anywhere else in the world, a monetary authority based on a decentralized structure which turned out to be 12 regional banks and that is one bug to boo some degree continues today. glass was nervous about the idea of placing power in the hands of what he was sure would be the new york financial interest with the central powers up watching and. so that's why we have patrolled and why he promoted.
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>> now, how much of that has remained vacant look at that at another time, not as much as one would think that now let's move 20 years later. mired in the deepening depression in very different experience from the panic of 1907, they recall the words expressing his hope for the federal reserve at the time of its creation. this is what he said in the first legislation that he saw for, quote, a careful revision and they wise reformation of the entire banking and currency system of the united states. whereby panic may be prevented or if not prevented, under which the violence may be diminished into the evil consequentially evaded. to the extent were these wishes fulfilled 20 years later? i fear we must say however well-intentioned they were
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wholly unfulfilled. panic was not prevented, it's violence not diminished but instead stipulated in the evil rather than abated for prolonged. moreover a strong case has been made that this is because rather than in spite of the federal reserve the tragedy is senator glasglass at that time did not examine or re-examine what he had wrought and how to address its flaws. he didn't consider the position of the monetary doctrine of the day starting the economy of liquidity because he subscribed to the doctrine. i referred to what was called a highly procyclical rather than countercyclical doctrine. the worse things got some of the more the fed pulled money out of the system and it continued to reinforce things that made things worse and worse while they were thinking why isn't this working we are doing
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everything we showed in all of the indicators of monetary policy indicate everything is as it is supposed to come and get they were making things worse with time. the economy was in decline but they have effectively reduced the supply of money and continue doincontinued doing that througt the decade is that he did nothing to review policies. he devoted his energies and skills display the affiliates. it was visceral he more than give even a problem. he felt that the market crash at its core was caused by bank owned securities affiliates and felt no need to find supporting data. his attention was turned away from the monetary policies.
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the formidable with a set of skills helped produce the act among which the provisions were told would ban the banks from being involved in security firms. now i'd like to turn to another book. this is the separation of commercial and investment banking. it's about the most boring book that i'vi've ever read. [laughter] and you really have to go through and read it. this is written by george benson, the author at emory university, and he would comb through the legislative record behind the act looking for the factual basis on which the provision of separating, banking security affiliates was based, and he found nothing. there was no factual basis for it. there were people quoting one another and sharing each other's opinions buother'sopinions but t the data and that is probably why five years after the passage of the act it didn't restore
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public confidence in the market or the economy, economic activity remained depressed until 1941 or 1942, and securities underwriting and trades didn't reach pre- depression levels until the 1950s. in particular, he searched for the factual support as i mentioned, and this was his conclusion after going through the entire record of working hard through it, the evidence from this period is totally inconsistent with the belief that thinks security activities or investments caused them to fail or cause to the financial system to collapse. those who claim otherwise either misread the record, didn't look at the actual data or simply believed these unsupported assertions made by senators and their staff.
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so let me sum up the lessons we might learn from all of that is that in the following 60 plus years, much of what has been put in place, the markets eroded and had been taken away when the law passed in 1999 to nothing new. the gramm leach bliley act put into statute of the regulators already created to keep up with what the markets were already doing, which was to expand the number of bank involvement and others in the financial securities markets because customers they didn't want to shop amongst different things. they wanted to be able to do a lot of stuff at the same place, but the point is remembered this ais a biography. it's about a person it is a good read if you want to see how humans are involved over a long period of time dealing with financial problems and they will do their very best and when they
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work together maybe you will get better results, but in the end may bmaybe the important lessons that is what is needed for these policymakers a certain dose of humility because time and the markets and others may very well change what it is useful about to do. you swap out to do. thank you. [applause] thank you to paul for inviting me to join in on the discussion and i thank you for a wonderful book and a great read and certainly the issues discussed in the book and the issues dealt with are very much still relevant today. i very much agree that this is a good read and i like the fact that it's a political history. it was difficult in the economic and financial issues, but i
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think what is great abou great t gives you the political background, it gives you the personal background his own personal biography i think explains a great deal about the perspective that he brought to these issues. he mentioned the interesting parallels they did have many parallels. they both grew up in the south and they were born shortly before the civil war. they were both progressives but they were decentralized and believed in resisting centralist were either financial, economic or political, and they also understood the centralist financial power and economic power almost always lead to more centralized political power and vice versa, so they did not support the new deal of
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government power. interestingly, he was involved iin a major decision that struck down parts of the new deal. as pointed out, he was probably the most outspoken congressional opponent of the new deal on the democratic side. he gave a very noted radio broadcast a speech against the court packing plant. they also didn't support into very much strongly opposed to the experience of the committee in 1913 they were both deeply distrustful of wall street rising as thithink as the citize south and they were very aware of wall street's economic power and how t they could money throh the system with the assistance
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of the federal reserve from all different parts of the country and put it into speculative purposes. the financial stability there had been a series of economic and financial panic leading up to the panic ever since the civil war. many causes for it but a lot of them tended to end up somehow connected to wall street and security speculation. i read the book. he's no longer with us so my criticisms be brief, but i think that he overstated the claims as much as he claimed by supporters of glass-steagall understand the case for glass-steagall. the case is that you have massive speculation on wall
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street in the 1920s, you have massive speculation in the bonds that were extremely hazardous and massive speculation and corporate bonds and securities that were extremely hazardous. the banks through the security affiliates national city was the biggest one and chase was the second-biggest but there were many others. they use those security affiliates to promote those around the country to unsophisticated investors and small banks and small insurance companies, the small banks and insurance companies were blown apart when the crash happened and glass and his compatriots knew exactly because they had people telling him wall street's hold us thesoldest these securie destroyed us and there's a lot in the recoron the record aboutt happened. it is an abundant record. there are people that attacked it but in my view even the
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record is abundant. there was plenty of security speculation that was very destructive and the wall street security affiliates were a part of it where the broker-dealers were also part of it coming if they were. one pushed the other to a greater extreme. let's jump forward a minute. okay, so after this, we basically had a very stable financial system until about 1980 than it began to be picked apart by regulators as was said and eventually after being picked apart by regulators for about 20 years, congress essentially repealed it. that was a ratification but it was more than a gratification. it gave legal certainty to the repeal and also gave 100% retail. regulators have never been able to tell more than 25 to 30%. what congress did in 1999 was to blow the rest of the park.
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what happened after that? okay, but pretty soon we had another massive speculative episode where the very risky real estate loans were packaged into residential that securities and collateralized debt obligations. those were spread rolling around the country but around the world and by the big integrated banks with their securities operation. yes they were competing with big securities firms and once again the bank and security firms pushed each other to ever greater access. that episode of speculation and promotion of hazardous securities was just as bad if not worse in the 1920s. the result was equally disastrous. i think people will tell you that correlation is not causation that seemed to b me te two times when banks became
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deeply involved in the securities markets, the 1920s the securities affiliates and 2000 after the repeal this produced the biggest cycles, the most destructive speculative episodes into the greatest economic disaster disaster for s country has ever experienced at least since 1907 and i think perform before words. in my opinion i it is more thana correlation. it is to become at least more a coincidence and i think that feeling should we risk another episode of the same it's worth asking because we now see new buildups particularly on the corporate side, the household site we are starting to see the death particularly in things like automobile loans. subprime mortgages are starting to come back. i'm not sure that we have learned the lesson he tried to
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teach us. he was concerned about conflict of interest in the banking system because banks giving investment advice and loan pits two of the most important things that they can do. bubut if the bank is lending to support the securities ventures it is no longer an object of wonder. it's funding to support another venture that it's trying to push. if they try to encourage its customers to buy securities the bank has underwritten, it is no longer an objective advisor. this was contrary to what he thought with a sound thinking principles and he also thought that it was trading service for the banks that had a unique access to the depositors funds which is the cheapest money one can get on the private market. look with your bank pays you, .1%, .2 if you are lucky. that's the cheapest money you can get in the private market.
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that money is being used to get into speculative securities operations is a great temptation to the banks into very dangerous temptation. he certainly thought the deposit should be used for speculative purposes. so there is a lot of wisdom in the act and the warnings about what he observed that i think we can learn from and should revisit. and maybe because i grew up in a small town also a certainly see the wisdom, i'll list them wasn't centered in washington and new york and was desirable to spread some of that around the country and sudan congratulations on writing a truly excellent and timely book. i learned a lot from reading it. thank you. [applause]
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i didn't know we were going to relitigate. [laughter] can you put on your best and split between the two? like a lot of people in this room i spent 20 years of my life as an advocate to preserve glass-steagall but i try to stay neutral in the book, and isolated. i think the best talk i ever heard was from a lawyer who just joined the house banking committee that i have no idea her name. she said she talked to her club and said she had been assigned to work on glass-steagall and have been doing it for six months. she didn't know much about economics or politics or banking that she didn't have to because she was from a religious family. christian reform from michigan,
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and she recognized the issue as a religious issue. ..
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>> roosevelt wants him to be the chairman and said i wont do it unless you change the structure to give me power. rosa has his people go along with it intervenes at the last minute it takes a little bit of that decentralization and those across the country still have a say. and it shifted the balance when it was 7030 or shifted the other way. >> it didn't totally shift because the open market still had seven people from the federal reserve. and in 2006 they gave the bank
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reserves power to the federal reserve board now the fomc. it is the policy that is supposed to vote on monetary policy but is now fully controlled so over time you can see arguments the reserve banks and you can see the debate continuing on. >> with the open market policy issues almost no defense comes from the members of the board.
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so then as they are willing to dissent the board will not and that is a healthy thing. and we talk about glass-steagall and the act but the independence of the fed. what would glass think of a president who wants to name kayden and more? actually he had his own dirty hands in this. he wanted the fed to be independent with the currency and so he leaned on and used with the different war bonds so then a bunch of presidents have leaned so the idea that he is way off the reservation
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or to be more exaggerated but it isn't some holy institution immune. >> please raise your hand wait for the microphone. >> once upon a time i use to write about these policies that talk about cost and benefits that with glass-steagall we know about the allegations of the cost to abolish it to a financial
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crisis but what i'm having trouble understanding is what is the benefit? the argument is if we get rid of it we need to innovation but i'm squarely in the camp either warren buffett so the only useful innovation is the atm. [laughter] so mortgage back securities at the very least is a mixed bag. summit asked the gentleman so what exactly other than the jv diamond bonus what is the benefit to get rid of glass-steagall defined in the payment system that makes it work so well and efficiently.
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and then to take the checkbook those are created by national banking so all of those repeals that with securities firms that allows to eliminate inefficiency going on 20 years to have a wider range of financial services of all types. it to make it much more competitive. so i remember when i was working at the senate banking committe committee, there was a tremendous concentration of power in the securities market. so when the banks got involved
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with the federal reserve there was much more competition so that has gone down dramatically. you couldn't price below a nickel on your securities. i bought a security the other day at the price was.0013 percent i don't even know what that is. but the efficiency is tremendous. >>. >> i am an adjunct professor of finance at georgetown school of business so there seem to be some consensus with the speculation is bad bad bad. that risk-taking obviously is
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at the core of capitalism and entrepreneurialism and i was reflecting that your definition of speculation is that people take too much risk with too much leverage so really it was leverage that was distinguishing risk-taking. are we stuck with the speculation when it doesn't work out and bad things happen? so it seems to me you cannot have creative destruction without risk-taking that is another form of speculation is it done by the private sector or to piggyback off the safety net? those are fdic insured under the last two crisis but that
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they will be paid off 100 cents on the dollar. look at what the banks pay you on the short-term deposits. that is federally insured and federally backed money. that is to say i win so the taxpayers lose. so loans are different they are long-term investments. they are not short term moving the market they should be regulated absolutely.
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that is what glass-steagall understood. that is not the long-term lending to people who can't get to the capital markets. >> but hasn't technology in many markets obliterated capital markets and banking? >> and that will bring us the next crisis unless we consider the virtues of that. under the current system i agree the brain - - the banks and financial markets are integrated and that is a dangerous move that many people disagree with me on that. >>. >> do any banks that failed because of the securities
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position? >> walkover yes. >> not true. look at how many banks during the depression. >> these are all securities. >> and i speak professor? they did not fail because of the security position but because of loans why did they fail in the last recession because of the lending possession not because of the securities position the banks that were in the strongest position to rescue the failing institutions the diversified banks that had a variety of activities of which they were involved. >> citigroup was in solvent and walkover you was insolvent. >> that is euro put on - - opinion but the facts don't show that. [laughter]
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they were in solvent for five times in history. >> thank you very much. and also thank you mister fink for the book. it would be a perfect couplet to the lord's finance i am white house correspondent for newsmax you brought up with that sabbatical stephen moore but they have felt it was just a part of history and did he have a lot of comments on similar appointments?
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and also naming catherine graham's dad to the fed. >> i do not recall reading anything. and then to be less surprise from that echo over everything they were thinking about. but then other presidents have been involved and glass himself tried to get the fed to do things that had nothing to do with monetary policy. >> in the provisions of the federal reserve act to just
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barely obey you cannot have more than one person from the same federal reserve district it is quite interesting creativity if you went to college they are backed in that particular district so the idea is to have people from all over the country. >> and really they were not qualified is crazy. there is no qualification for the federal reserve board governor and really it is only politics. the president nominates you and you are liked by the senate they approve use of the only qualification is to be politically connected really. >> for whatever reason there is a lot of colts in the town
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with the fed that people refer to it as the temple they all put on their pants the same way that we do the greatest public servant i have ever met but the fed in the seventies for the money market funds and they have reserve requirements on checking accounts and not on savings accounts. to studies that said they were acting like savings accounts not checking account they were not transacting very much and went to see voelker with that he said i don't care my wife is a bookkeeper and pays the payroll by writing checks on the dreyfus money market fund so this great genius was facing national policy on his wife's occupation.
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[laughter] >>. >> good evening it's an excellent panel from the american university here in washington not trying to get anybody in trouble in the sixties president kennedy in regard to the federal reserve what did he try to do? what could or should he have done? to talk about the presidency in relation to the federal reserve. >> i have no knowledge on that.
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even that is young for me. [laughter] i was watching cartoons on saturday. [laughter] and it was under johnson so that relationship definitely had a colorful career truman appointed him he helped to negotiate the treasury court and they nominated him as governor and very quickly started to do things that truman did not want and truman was very angry and said that's the worst decision that i ever made. but he also coined the fed's job to take away the punch
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bowl. i don't recall kennedy did a lot but chesney martin actually resisted to lower rates under kennedy that johnson put the cabanas on and they were at all loggerhead. but i don't think kennedy was so successful to jawbone but those i got to them with my recollection. that's a different book and a different topic. >> we have time for a couple more questions. >> what is the panel prognosis
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that are advocating to quadruple capital gains tax rate with the low unemployment rate? by the way voelker one --dash one --dash. [inaudible] >> i am not an economist if you know the tax capital more you get less capital return and less capital investment in the end sooner or later it will affect productivity if that is eroded than the growth in the economy becomes eroded.
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you focus glass but not mentioning steagall at all. so the question for me is mister abernathy says there was no data to support the separation. how do they sell that in the house if there was no data? what were they operating on i think they were concentrated on the fdic insurance. they did no heavy lifting on the other policies steagall just happen to be there. so they took what glass had don done. >> there was a lot of hearings going on that this is the same
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time the united states bank failed. they picked up on that with the biggest securities affiliate in the country. >> but the congressman in connecticut says you cannot serve two masters we have to get out of the securities business. the whole house applauded the speech but that indicates their state of mind. >> been going through a horrible banking crisis everything they have in the bank with a stock market crash people cannot separate out what's going on. but the banking industry did
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not strongly oppose that. so they thought if we could get rid of that. >> but a couple in particular it's a big bank small bank it is not a monolith. the big institutions are the smallest institutions and the baseball teams which did not have soccer back then. and the glass was a big figure so huge difference paid as well. >> and that getting hundreds
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of thousands of letters. >> the centralization with the board versus a local regional banks had something to do with the internationalization of banking and financial flows. or did everybody just assume this was an american system. >> i think they were focused on america it was 1913. but i have to pull the punch bowl. i am sorry.
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[laughter] [applause] he's willing to autograph the book it's a really good book. [inaudible

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