The Glass-Steagall Act, signed into law by US president Franklin D Roosevelt in 1933, was a product of the banking crises which led to the Great Depression. It aimed to prevent deposit-taking financial institutions from engaging in risky speculative investment activity.
Depositors were mostly unaware of how their funds were being used by banks and this, many believed, worsened the panics. In the aftermath of the crisis, a strict separation of investment and commercial banking was deemed a logical step forward in protecting depositors.
Now, a similar proposal is being touted for large technology companies by David Cicilline, a Democratic member of Congress. A key problem once again is the misuse of deposits. This time, however, it is not funds being deployed in ways customers do not appreciate but their data.
This is why Mr Cicilline, the head of the House antitrust subcommittee, is recommending that tech companies separate the parts of their business that operate platforms from the parts that sell and monetise data.
The proposal is intuitively appealing. Unfortunately, it is largely unworkable. Social media and tech platforms are structurally different to banks. Where risky investment activity supplemented banks’ bread-and-butter retail operations in terms of profitability, data-mining is intrinsic to the ability of social media platforms to generate income.
Furthermore, the act of transferring data monetisation activities into separate companies is unlikely to reduce the conflicts at hand in any case. One need only look at how things played out with the original Glass-Steagall for a clue to how things might evolve in the tech space.
By the 1990s, lawyers in the US had discovered enough legal loopholes to facilitate significant commercial and investment bank consolidation regardless of the provisions of Glass-Steagall. The law was eventually repealed in 1999.
It is still a matter of debate whether the scrapping of the act contributed to the global financial crisis of 2008. While some believe it did, the US regulatory response has focused instead on imposing much stricter rules across all globally systemic banks.
Bearing that in mind, a more pertinent concern for antitrust regulators, therefore, should be the significant efforts tech platforms are now taking to enter the financial services sector outright. From Google Pay and Apple Pay to Amazon Pay and Facebook payments, almost every major social platform is rolling out a payments or financing service to customers these days.
In some cases, platforms operate in partnership with banks; in others they acquire money transmission licences in their own right. But across the board, the growing assumption (and concern) is that the ultimate objective of the tech companies is to compete directly with banks — while benefiting from a much lower regulatory burden than banks are currently subject to.
The dangers from an antitrust point of view are self evident. If concerns about tech platforms misusing our data behind our backs are already grave enough, consider the even greater potential for abuse when it comes to the real use of customer funds in the closed market systems many of these platforms govern.
We are no longer talking solely about the misuse of data in exchange for fees, but the capacity to use customer capital to misdirect an entire economy from a singular algorithmic command point. When it comes to a new Glass-Steagall, therefore, politicians and regulators would be better off focusing their attentions on separating finance from digital platform activities altogether. Failing to do so risks not only stifling competition, but also creating the sort of central economic planning system that in the past led to major capital misallocations in command economies such as the USSR.
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