A Depression-Era banking law is helping to shape the 2016 presidential field, as Wall Street critics push hard for its return.
The Glass-Steagall Act, the 1933 law that established a firewall between investment and commercial banking, was repealed 16 years ago on Thursday.
{mosads}Where candidates stand on its possible return has become a litmus test in both parties, with supporters arguing Congress needs to restore it to prevent the next financial collapse.
The debate is leaving the 2016 field, and particularly Hillary Clinton, in a tough spot.
“A lot of people view it as a litmus test,” said Dennis Kelleher, president and CEO of the Wall Street reform group Better Markets.
For those who are in favor of restoring the law, a candidate’s backing Glass-Steagall says “‘I get it, I get it. I will be tough on Wall Street. Trust me,’” Kelleher said.
Calls from the left and right for a return to Glass-Steagall have popped up all over the campaign trail, particularly from feisty populist underdogs.
The calls are more popular on the Democratic side, where both Sen. Bernie Sanders (I-Vt.) and former Maryland Gov. Martin O’Malley have echoed Sen. Elizabeth Warren (D-Mass.) in supporting restoration of the law.
In the Republican field, former Arkansas Gov. Mike Huckabee is the only active candidate who backs putting Glass-Steagall back in place, though former Texas Gov. Rick Perry proposed a new banking firewall as part of his Wall Street overhaul before he dropped out of the race.
Democratic frontrunner Hillary Clinton and many of her potential GOP rivals are trying to find space in the center to tap into public unrest over Wall Street without turning off Wall Street’s deep fundraising wells.
An October Washington Post/ABC News poll found that most members of both parties favor tougher rules for the financial sector, with 67 percent of overall Americans in favor of a further crackdown.
During the October Democratic debate on CNN, the former law served as one of the clear fault lines between the candidates. O’Malley and Sanders directly criticized Clinton for her Wall Street stance. Meanwhile, Clinton said her plan was more comprehensive and did the job better.
Wednesday’s debate on Fox Business opened the door for some more tough bank talk from the GOP field.
While Glass-Steagall was not directly mentioned, Ohio Gov. John Kasich said Wall Street needed an ethics lesson, former Florida Gov. Jeb Bush pushed for even higher capital requirements for banks, and Sen. Ted Cruz (R-Texas) said he would “absolutely” go after law-breaking bankers and would refuse to bail out a bank in trouble.
Several candidates railed against big banks’ ability to hire lobbyists and lawyers to navigate complex financial rules.
The debate also gave trouble to moderates seeking a tempered tone.
Cruz and Kasich got into one of the feistier exchanges of the night over bank bailouts, as Kasich said he would save a bank to save depositors while Cruz blasted him for favoring Wall Street over “Mom and Pop” operations.
And Bush gave a muddled response to the bank bailout question, saying banks should have higher capital requirements, and seemingly predicting such a move would guarantee no future financial crises. When pressed by the moderator, Bush backed away from that stance. Also, banks have already raised capital significantly since the crisis.
The Democratic frontrunner is in a particularly odd spot when it comes to Glass-Steagall, since her husband President Bill Clinton signed the law repealing it in 1999.
At the time, he touted the new law as “stimulating greater innovation and competition in the financial services industry.”
Since the financial crisis, former President Clinton has stuck by his guns, arguing that there is no evidence Glass-Steagall would have prevented the crisis.
Hillary Clinton’s campaign has been eager to defend the Dodd-Frank financial reform law, and is pushing higher “risk fees” on large financial institutions and tougher rules on “shadow banks” that fall outside traditional regulatory oversight.
But she has not embraced Glass-Steagall specifically, calling the matter too complicated for a single cure-all bill.
Skeptics of Glass-Steagall repeal argue that much of the talk around the law is overblown.
“If you are a group that is critical of Wall Street and large banks, it holds some romantic resonance for you,” said Tony Fratto, a former Treasury Department spokesman and partner at Hamilton Place Strategies. “If one percent of people actually know what Glass-Steagall did and what it would do now, it’s not more than that.”
Hamilton Place Strategies has been aggressive in pushing back against further action against large banks, which it counts among its clients.
Fratto points out that while talking up Glass-Steagall and other bank bashing is popular in some political circles, the current frontrunners in both parties are not particularly known for that trait, while challengers shining a spotlight on it lag in the polls.
“It’s not something that’s blazing out there. I would see poll numbers move on it. I would see candidates move on it,” he said. “I don’t get any sense that Hillary Clinton is suffering at all.”