Saturday, June 18, 2011
Glass-Steagall
In a previous blog I discussed the Glass-Steagall act, a law that saved us from banking disasters for more than half a century. It was repealed in 1999 in a bipartisan vote, and the repeal was signed by then-president Bill Clinton, advised by Lawrence Summers. The vote to repeal included the names of quite a few "liberal" senators, who may very well regret that vote now (I hope they do). Here is another piece about Glass-Steagall from today's NY Times.
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How exactly did the supposed "repeal" of Glass Steagall via the GLB Act cause the banking and credit crises of 2008? Even before GLB, institutions like Bear Stearns and Lehman Brothers were able to write credit default swaps and issue mortgage backed securities.
ReplyDeleteFirst of all, read my older blog about Glass-Steagall (see link in the post above).
ReplyDeleteI think the repeal of Glass-Steagall was not THE major factor in the banking and credit crisis. General erosion of regulation and gross (I'd say criminal) perversion of ratings were perhaps even more important factors. Nevertheless, Glass-Steagall served a very important purpose in separating the commercial and investment functions of banks, and certainly protected us from mischief for many decades. The resurgence of the power of financial institutions via lobbying etc. set the tone for both deregulation and repeal of G-S.
I'm not sure what Anonymous means when referring to Bear Stearns and Lehman Brothers; I assume that it was the investment banks that issued CDS's and CDO's and that commercial banks would have been, at least formally, prevented from doing so by G-S.
Pure investment banks could have been allowed to fail. But, given what we now know, would we want commercial banks to be dealing with CDO's: issuing them and speculating in them -- even when they are rated AAA by Moody's (what a joke)?
(My understanding is that CDS's (Credit Default Swaps) were [mainly] issued by insurance companies like AIG, not by banks -- and certainly not by commercial banks. Of course, they were totally unregulated, even by the usual insurance regulators.)
First of all, I did read your original piece on GS. My point of bringing up Bear and Lehman is that the bad things done by many of the culprits in the crisis of 2008 were not all of a sudden allowed by the passage of the GLB Act. These institutions would have been allowed to do all these toxic things both before and after the passage of GLB. Furthermore, only parts of GS were changed - the part of GS prohibiting commercial banks from underwriting or dealing in securities was and still is the law. The GLB Act only repealed the part that allowed banks and securities firms to be owned by the same holding company. Nothing that the GLB Act permitted contributed to the crisis. Commercial banks today are not allowed to issue mortgage backed securities and unfortunately they were allowed to invest in them even before GLB.
ReplyDeleteCare to tell me how exactly the passing of the GLB Act contributed to the credit/housing crises of 2008?
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