Today’s international trade pacts are often thousands of pages long and cover far more than just reductions in tariffs on goods traded across borders. Many modern trade agreements also impose strict limitations on governments’ ability to establish domestic policies that in any way encroach upon international commerce. These restrictions specifically cover environmental, agricultural, procurement, intellectual property, investment, product safety and many other policy arenas. According to Public Citizen, “Deregulation of the financial service sector—including banking, insurance, asset management, pension funds, securities, financial information and financial advisory services—has been among the most important, but least discussed aspects of the World Trade Organization’s (WTO) agenda since its 1995 inception.”
The Roots of Banking Regulation
During the Great Depression, Congress passed the Banking Act of 1933 (also known as the Glass-Steagall Act) to create a firewall between “commercial banks” that primarily took deposits and made out loans and larger “investment banks” that provided a wide range of other financial services. Glass-Steagall mandated the separation of these two types of banks, and among other things, federally-insured commercial bank deposits, while leaving the risks associated with speculative investments in the hands of individual investors. The overriding concept behind this law—based on the experience of economy-wide financial collapse during the late 1920s and early 1930s—was that American citizens’ personal savings and their ability to take out loans should be protected from potentially-unwise speculation on the part of large financial corporations.
The World Trade Organization’s “General Agreement on Trade in Services” (GATS)—which was lobbied for intensively by financial service firms from the U.S. and elsewhere—required that the United States allow foreign banks to do business in this country even if they did not separate “commercial banks” from “investment banks.” The Clinton administration knew that this would create conflict with U.S. law, and made a formal commitment to support changes to the Glass-Steagall Act while negotiating the GATS. In 1999, President Clinton signed a repeal of Glass-Steagall into law, deregulating financial markets not only for foreign companies, but also for domestic corporations. Other parts of the WTO’s “Financial Service Agreement” (FSA) further locked-in this deregulation and spread it to other countries throughout the world. Establishing new banking regulations in conflict with the FSA is impossible under current international trade obligations without risking the imposition of hefty annual penalties.
The Current Crisis
The massive mergers between commercial and investment banks that have taken place in recent years have created an environment in which the speculative losses of one sector of the nation and world’s financial institutions can have immediate and serious repercussions on other sectors, including bank deposits, access to loans and other financial services. In this environment, the United States “cannot afford” to allow a risk-taking, speculative financial company to fail without risking the failure of commercial banks. This new reality resulted in the $700 billion financial sector bailout that Congress approved in October 2008.
A Path Forward
Many steps are needed to improve the economy for working people. One first step is to re-regulate the financial sector in the United States and around the world so that the speculative risks accepted by investors no longer threaten to drag down the entire global economy when they do not pay off as expected. This re-regulation or new regulation would clearly be WTO-illegal. In order to avoid a costly WTO challenge, Congress should also pass the Trade, Reform, Accountability and Development (TRADE) Act, which would allow all countries to regulate financial services in the best interests of their citizens.