Skip to comments.Why The Glass-Steagall Myth Persists (No Evidence Its Repeal Caused the Financial Crisis)
Posted on 11/13/2012 6:22:42 AM PST by SeekAndFind
The growth of government intervention over the last century was built on the back of a handful of myths. A generation ago, the dominant myth was that free markets had caused the Great Depression, a falsehood ultimately debunked by economists like Milton Friedman. Today, the key myth is that financial deregulation caused the 2008 financial crisis.
What deregulation? There arent many possibilities. Despite what we hear, regulation of the financial industry substantially increased over the last thirty years. Government spending on financial regulations, to take one measure, ballooned from $725 million in 1980 to $2.07 billion in 2007 (in 2000 dollars). Anyone looking to blame deregulation for the crisis faces slim pickings.
By far, the single most cited example of this financial deregulation is the Gramm-Leach-Bliley Act (GLB), which partially repealed the Glass-Steagall Act thirteen years ago today. Regulatory evangelists including Nobel Prize economist Joseph Stiglitz and recent senatorial candidate Elizabeth Warren, not to mention the Occupy Wall Street protesters, have named the overthrow of Glass-Steagall as public enemy number one.
Stiglitz, for instance, in a lengthy piece for Vanity Fair, could only muster two examples of the deregulation he thinks bears primary responsibility for the crisis: the repeal of Glass-Steagall and theSECs 2004 decision to raise banks debt-to-capital ratio from 12:1 to 30:1. The latter, of course was not deregulation, but re-regulation. For the regulatory evangelists, the repeal of Glass-Steagall is all theyve gotand what theyve got aint much.
Glass-Steagall was enacted in 1933 to create a firewall between commercial and investment banks: commercial banks could not underwrite or deal in securities, and investment banks could not accept deposits. The Act also restricted commercial banks from being affiliated with any company that underwrote or dealt in securities.
(Excerpt) Read more at forbes.com ...
In 1999, President Clinton signed GLB into law. Although it left the bulk of Glass-Steagall in place, it ended the affiliation restrictions, freeing up holding companies to own both commercial and investment banks.
There is zero evidence this change unleashed the financial crisis. If you tally the institutions that ran into severe problems in 2008-09, the list includes Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and Fannie Mae and Freddie Mac, none of which would have come under Glass-Steagalls restrictions. Even President Obama has recently acknowledged that there is not evidence that having Glass-Steagall in place would somehow change the dynamic.
It lessened the hysteria of a down market feeding off itself. Guess who made megabucks by shorting the market? Not little people like you and I with 401K's, but scumbags like George Soros.
Try asking your 401K manager sometime if you can invest in a fund that shorts the market. See the reaction you get.
Making money by destroying wealth is only a game which the well-connected can play. When TSHTF, Wall Streeters may very well join the Nicolae Ceaușescu counterparts in America in dangling from lamp posts or stood before firing squads.
Obama got re-elected.
The Fake White Indian is a Senator.
Reap the Whirlwind, Bankers.
Glass-Steagall repeal actually helped ease the 2008 crisis by allowing larger banks to buy up the troubled investment banks.
You need to shout it from a mountain top.
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