Why Is Glass Geagall Act Important

GLASS- STEAGALL ACT
The savings and loans crisis demonstrate the importance of Glass-Steagall Act. First of all Glass-Steagall Act was a part of Banking Act 1933. This act separates the banking and commerce. Under this system the banking operations were given federal subsidies but the investment banks which were allowed to own equities or stocks or any kind of property were not given this federal subsidy. Secondly, it created FDIC which makes money bank as good as another. Thirdly, it regulates the entry of banks. This was done to maintain the quality of the Banking system, prevent excessive competition and restrict their activities to lending money to the borrowers, to prevent it from financial abuses and fraudulent practices and also to
The Deregulation Act permitted the depositary institutions to invest in financial institutions which were risky institutions as they carried massive risk. Savings and loans institutions were allowed to own whatever they want to depending on their status. So, they lent huge loans not to the troubled properties but to their buyers who were not real or as William black quoted them as “straw man”. These loans were made on the appraised value of the property. Therefore they converted those massive losses to the gains and this ended disastrously as it slowed the takeover of savings and loans. Due to the removal of barrier between Banking and commerce and volatility in the interest rate, the savings and loans institutions crashed and went
But it could not be sustained. The biggest reason for this was the Deregulation Act because the banks were continuously pressurizing the government to loosen the restrictions imposed on them. When government passed the Deregulation Act, it increased the indulgence of depository institutions in the financial markets this diversification led to the negligence of this act. Interest rates were increased beyond the limits. The dominance of powerful people in the thrifts chucked out the transparency of this industry which gave rise to fraudulent practices. Savings and Loan crisis was a failure of public policy.
The factors such as criminality, faulty audits and increased insurance in savings and loans did not cause the debacle. Rather these were the consequences. Delay in closing the savings and loans which became insolvent were the reason for criminality. Bank Board “Bailed out” $600 billion in 1989 to get a control over the situation. Increased insurance limit to $100,000 did not make S&Ls to go out of control rather it was made easier to put money into the insolvent S&Ls.
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