Lastly, housing prices would still have run up to absurd levels and then collapsed.
So no, the repeal of Glass-Steagall was not a proximate cause of the crisis. But its impact was both nuanced and complex. Consider the context in which it occurred:
● The repeal of Glass-Steagall in 1999 was part of a broad deregulatory push, championed by the likes of Fed chief Alan Greenspan, Sen. Phil Gramm (R-Tex.) and Treasury Secretary Robert Rubin, that eliminated much of the oversight on Wall Street. Freed from onerous regulation, the banks could “innovate” and grow.
● After the repeal, banks merged into more complex and more leveraged institutions.
● These banks, which were customers of nonbank firms such as AIG, Bear Stearns and Lehman Brothers, in turn contributed to these firms bulking up their subprime holdings as well. This turned out to be speculative and dangerous.
So we can say that Glass-Steagall’s repeal allowed the credit bubble to inflate much larger. It allowed banks to be more complex and difficult to manage. When it all came down, the crisis was broader, deeper and more dangerous than it would have been otherwise.
Glass-Steagall’s repeal, after 25 years and $300 million worth of lobbying efforts, culminated decades of deregulation.
Newfangled derivatives? No oversight, reporting or reserves necessary, courtesy of the Commodities Futures Modernization Act of 2000. Subprime-lend-to-sell-to-securitizers business model? Those are the financial innovators! At least, that is what Greenspan called them, and why he refused to oversee them as Fed chairman. Rules on SEC leverage? Let’s create a special exemption from the law for just five investment banks.
Of course “reputational risk” would serve as a deterrent to poor decision making! No bank would ever behave so recklessly as to put their own hard-won status on the line — or its very existence.
How’d that idea work out?
With Glass-Steagall, there would not, could not, have been a Citi/Travelers merger, and competitors would not, could not have bulked up the way they did. Major money center banks most likely would have been smaller, more manageable, more easily wound down. Arguably, too big to fail might not have been the rule, and bailouts might not have been necessary. This is, of course, mere supposition.
What we should be discussing is the corrupting influence of crony capitalism and radical deregulation. Instead, we find ourselves forced to defend capitalism and free markets. We should be finding ways to definancialize the U.S. economy and reduce bankers’ influence.
There are lots of thing we can do about this, but I have a modest suggestion that would be a good start: No more Wall Street bankers as Treasury secretaries. It would be much better for the nation to find someone from industry who understands finance rather than finding someone from finance who understands industry.
Consider where we would be today if we put Citi and Bank of America into prepackaged bankruptcy (as was done with GM). It would have been much more painful, but ultimately, much healthier.
The past 50 years have seen a dramatic financialization of the American economy. Wall Street has morphed from serving industry to a Titanic leaving a damaged economy in its wake.
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz
Loading...
Comments