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The Glass-Steagell Act Analysis

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The Glass-Steagell Act Analysis
arriers between commercial and traditional banking, facilitating flow of capital into housing and warding off unnecessary conflicts of interest and excessively risky investment activities. But the act had served its time. When it was repealed it was a time when the macroeconomic situation was such that it simply could not be sustained- inflation was at its peak, the Fed had undertaken a tight monetary policy and financial deregulation was inevitable. This scenario was entirely different than the one seen during the Great Depression which had necessitated the coming into being of the Glass-Steagell act in the first place. Since the Great Depression, the US economy had changed, and changed for good. But unfortunately the Glass-Steagell Act did …show more content…
The early 1980s saw the introduction of the two most significant acts of deregulation. The first one, Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1982, introduced in the Carter era, initiated the complete phase-out of interest rate ceilings over a period of six years, thus allowing depository institutions to operate in the market with competitive rates of return. It also increased the depository insurance from $40,000 to $100,000 and required all banks to hold reserves with the Fed. The second act, the Garn-St. Germain Act of 1982, introduced under President Reagan, authorized thrifts to diversify their portfolio where they could hold 10% of their assets into …show more content…
Thus the thrift industry was already in distress by the end of 1970s and reported huge losses in the 1980s, the net worth of the industry approaching zero. Yet no substantial actions were taken at this time to prevent to some extent the inevitable crisis. FSLIC, the thrift industry’s deposit insurance fund, was ill-equipped to deal with the insolvency crisis at that point of time. It had reserves of $6.3 billion at the end of 1982 but would have required nearly four times that amount, $25 billion in early 1983 to bail out the insolvent institutions. Moreover, many government officials believed insolvency of these institutions was a phenomenon which mostly occurred on paper- the income of these firms were actual mortgage payments but their expenses were interest payments credited to savings accounts, which were not withdrawn. So, according to these officials, they technically were not facing an “actual” crisis (Sherman,

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