The Glass-Steagall Act, the subject of a previous blog, prevented commercial banks from engaging in speculative investment practices -- the exact kind of practices that led to the recent financial crisis. The banks fought bitterly to have it repealed, and they succeeded in 1999, with then president Clinton -- encouraged by Robert Rubin and Larry Summers -- gladly signing it. The vote to repeal was lopsided and a terrible mistake. Here are the votes (italics and color for emphasis are mine):
REPUBLICANS FOR (52): Abraham, Allard, Ashcroft, Bennett, Brownback, Bond, Bunning, Burns, Campbell, Chafee, Cochran, Collins, Coverdell, Craig, Crapo, DeWine, Domenici, Enzi, Frist, Gorton, Gramm (Tex.), Grams (Minn.), Grassley, Gregg, Hegel, Hatch, Helms, Hutchinson (Ark.), Hutchison (Tex.), Inhofe, Jeffords, Kyl, Lott, Lugar, Mack, McConnell, Murkowski, Nickles, Roberts, Roth, Santorum, Sessions, Smith (N.H.), Smith (Ore.), Snowe, Specter, Stevens, Thomas, Thompson, Thurmond, Voinovich and Warner.
DEMOCRATS FOR (38): Akaka, Baucus, Bayh, {{{{BIDEN}}}}, Bingaman, Breaux, Byrd, Cleland, Conrad, Daschle, Dodd, Durbin, Edwards, Feinstein, Graham (Fla.), Hollings, Inouye, Johnson, Kennedy, Kerrey (Neb.), Kerry (Mass.), Kohl, Landrieu, Lautenberg, Leahy, Levin, Lieberman, Lincoln, Moynihan, Murray, Reed (R.L), Reid (Nev.), Robb, Rockefeller, Sarbanes, Schumer, Torricelli and Wyden.
REPUBLICANS AGAINST(1): Shelby.
DEMOCRATS AGAINST(7): Boxer, Bryan, Dorgan, Feingold, Harkin, Mikulski and Wellstone.
NOT VOTING: 2 REPUBLICANS (2): Fitzgerald (voted present) and [fighting maverick John] McCain
Note the lone Republican vote against: by then and current Alabama senator Richard Shelby. Only the most independent Dems had the guts to vote against the repeal. Alas, Paul Wellstone -- we really miss you! (When Wellstone died I knew there was no god.)
There is a nice survey article on Glass-Steagall: HERE; well worth browsing.
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I don't think the Gramm-Leach-Bliley Act had much of anything to do with the crisis. The major problems were pure investment banks (Lehman, Bear Stearns, Merrill etc) or they were just commercial banks who were otherwise just bad at banking (Wachovia, Washington Mutual etc). The only exception is Citigroup who already had an exemption prior to the passage of the act anyway. Also, a lot of corporate finance people have argued that it's actually relatively simply to contract around the Glass-Steagal provisions. The contracts just become messier and actually make the market informationally inefficient which is probably worse than just letting them combine. JP Morgan would have been fine without TARP (we forced it on them in order to prevent an irrational bank run, rightfully in my view) and Bank of America's troubles are more of a side causality due to financial contagion that they didn't adequately protect themselves from. I see no evidence that Glass-Steagal would have done anything to prevent this crisis. In fact, it could have made it worse since Bank of American would have been unable to merge with the failing Merrill Lynch, which would have been worse than a Lehman failure. Interesting enough, Randall Kroszner and Raghuram Rajan have made a persuasive case that the Glass-Steagal act had no economic basis as a response to the Great Depression either.
ReplyDeleteGranted there are so very impressive names that argue that Glass-Steagal's repeal was important, such as Joseph Stiglitz; but his argument seems more or less incoherent to me. He recognizes the critique I'm talking about, but argues that the merging cause social spillovers where risky investment-bank culture overtook conservative commercial bank culture. I guess you can appeal to the social interaction / social multiplier literature, but I don't find that explanation appealing.