Bank Crisis Through The Ages

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Each financial crisis in American history has brought sweeping changes and pledges that bank failures will be averted in the future. Planet Money's Chana Joffe-Walt and Alex Blumberg take a tour of financial regulation through the ages.

LIANE HANSEN, host:

President Obama has come out with a plan to overhaul our system of financial oversight, designed to keep banks from imploding and putting the economy at risk. American presidents have been there before.

Our Planet Money team takes a look back at financial regulation through the ages. Here are Alex Blumberg and Chana Joffe-Walt.

CHANA JOFFE-WALT: This is great. It'll be a quick, exciting tour of crisis, despair, redemption and then crisis again.

ALEX BLUMBERG: I think I've been on this tour with my family when I was a kid.

JOFFE-WALT: Yeah, but this one goes back in time, Alex. It'll be fun. There's music. Come on, let's start.

(Soundbite of music)

JOFFE-WALT: It's 1907 and there is a panic.

BLUMBERG: Wait, wait, Chana. Chana, he's about to start singing.

(Soundbite of music)

Unidentified Man #1: (Singing) Look up and smile my little darling. You're (unintelligible) to see.

JOFFE-WALT: Okay, 1907, the U.S. is facing a serious economic crisis: interest rates are soaring, there are bank runs and people start saying, hey, shouldn't I have some sort of public administration to help us with these panics? We have them all the time.

BLUMBERG: So, we created the Federal Reserve. It would hopefully keep money circulating, prevent bank runs and be there as a last resort if banks get into trouble.

JOFFE-WALT: Yes. President Woodrow Wilson, 1913, he signs the Federal Reserve Act and says this - you won't hear his voice here - it's historian Andrew Wender Cohen reading his words.

Professor ANDREW WENDER COHEN (Historian, Maxwell School of Syracuse University): And the control of the system of banking and of issue, which our new laws are to set up, must be public, not private, must be vested in the government itself, so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative.

BLUMBERG: Banks are not the masters. It's a timeless phrase.

JOFFE-WALT: So, Panic 1907 gives us the Federal Reserve and then we're solid, Alex, until things fall apart again.

(Soundbite of song, "Brother, Can You Spare a Dime?")

Unidentified Man #2: (Singing) They used to tell me I was building a dream of peace and glory ahead. Why should I be standing in line just waiting for bread?

BLUMBERG: I know this one: The Great Depression.

JOFFE-WALT: Runs on banks, crazy unemployment, things get really bad. So, time for a president to add some more regulation. This time, FDR.

President FRANKLIN DELANO ROOSEVELT: Your government does not intend that the history of the past few years shall be repeated. We do not want and will not have another epidemic of bank failures.

BLUMBERG: Things sure do sound a lot more ironic when you're listening to them from the future, don't they?

JOFFE-WALT: Yeah, but The Great Depression did give us two things. Number one, the FDIC.

BLUMBERG: Everyone mostly loved that. Their deposits were insured.

JOFFE-WALT: And we still do. People generally think that right there is an example of effective reform. Now, it was part of the Glass-Steagall Act, which also gave us the second thing. It said investment banking could not be the same as the banking of consumers.

BLUMBERG: So, Chana, we're only at The Great Depression. How long is this tour?

JOFFE-WALT: Okay, okay. Just remember that Glass-Steagall, regular folk banking separate from speculative banking. Okay, next stop.

(Soundbite of song, "Like a Prayer")

MADONNA (Singer): (Singing) Life is a mystery. Everyone must stand alone.

BLUMBERG: Wow. We made it all the way to my senior year of college without a financial panic.

(Soundbite of laughter)

JOFFE-WALT: Yeah. It's 1989. We are in the middle of the savings and loan crisis. So, Alex, we're moving fast through this. Before Madonna, there were a couple of important changes. Earlier in the decade we loosened up on the way we regulate home mortgages. And then in the late '80s, early '90s, more than 700 savings and loans failed.

BLUMBERG: So, we add regulation.

JOFFE-WALT: Right. President Bush gets rid of the regulator for savings and loans and replaces it with a new agency, the Office of Thrift Supervision. He trashes one regulator, puts in place another.

President GEORGE H.W. BUSH: Never again will America allow any insured institution to operate normally if owners lack sufficient tangible capital to protect depositors and taxpayers alike.

BLUMBERG: Man, again with the never again. We've heard that a lot on our tour, haven't we? It's a pretty confident statement.

JOFFE-WALT: Yeah, well, we did get pretty confident after this - some might say overconfident.

President BILL CLINTON: I know this is a banking crowd, but you don't have to be stiff. Relax here, have a good time, you know.

(Soundbite of laughter)

BLUMBERG: That's President Bill Clinton making a little joke about stiff bankers right before he signs the Gramm-Leach-Bliley Act in 1999.

JOFFE-WALT: If crisis adds regulation, good economic times, like with President Clinton, tend to do the opposite. The Gramm-Leach-Bliley Act, which Clinton is signing here, undid that law from the 1930s that said investment banks and commercial banks had to operate separately.

BLUMBERG: So, there's not a lot of never-again rhetoric here. It's more like, look how far we've come. We don't need that old Glass-Steagall law from the 1930s that President Roosevelt passed.

Pres. CLINTON: It is true that the Glass-Steagall law is no longer appropriate to the economy in which we live. It worked pretty well for the industrial economy, which was highly organized, much more centralized and much more nationalized than the one in which we operate today. But the world is very different.

BLUMBERG: And, Chana, a lot of people, including President Obama, point to this moment, where President Clinton is signing this bill, as being a key step in getting us where we are today. Companies merged and got huge. Of course, other economists argue that it's not that clear.

JOFFE-WALT: Yeah, so speaking of today…

(Soundbite of song, "Just Dance")

LADY GAGA (Singer): (Singing) Just dance, gonna be okay. Da-da, doo-doo, just dance.

BLUMBERG: (Singing) Just dance, de, de, de, de, de.

(Soundbite of laughter)

BLUMBERG: Oh, hello, hello, I guess, and here we are in the present.

JOFFE-WALT: Okay, yes. Here we are, crisis number whatever. Mr. Obama wants to now reshape regulation in the mold of this crisis. He's calling for tighter regulation of large financial firms, he wants a way for the Federal Reserve to take over enormous companies, and he wants a consumer protection agency and he would like to get rid of the Office of Thrift Supervision.

BLUMBERG: The agency that we heard President Bush creating 20 years ago.

JOFFE-WALT: All right. I think that brings us up-to-date. The end of our tour, ladies and gentlemen.

BLUMBERG: Please feel free to tip your tour guides on the way out. My name again, Alex Blumberg.

JOFFE-WALT: Or, wait, Chana Joffe-Walt. NPR News.

(Soundbite of song, "Just Dance")

LADY GAGA: (Singing) Da-da doo-doo. Just dance. Gonna be okay, da-da, doo-doo, just dance. (unintelligible). Just dance. Gonna be okay, da-da, doo-doo (unintelligible). Just dance, dance, just dance.

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