"The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression."
Being right is tough, especially when you're not vindicated until years later (and after years of "success" by the new policies).
More:
"''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska."
another great quote . . he even got the timing right
''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''
besides the s&l crisis, the long term capital blowup seems to be another good comp in hindsight.
Humans learn best by quick feedback (I think Gladwell had an article about this, can't recall). In complex systems, such as economies, changes can take a long, long time to propagate. Teasing out true cause and effect is pretty much impossible. (Programming large systems can be this way too)
Given this lag time, decision makers never really learn to be experts, since there's no quick feedback.
So Wachovia, instead of being sold to Wells Fargo, should have just went bankrupt? And Merrill Lynch, instead of being bought by Bank of America, should have went bankrupt? That would have eased the crisis, how?
Glass Stegall would have blocked both of those transactions.
Would Glass-Stegall have reduced unprecedented capital flows into the US housing sector from overseas investors and the monetary and fiscal policies of our own government? Because if you still have those capital flows, you still have housing prices going up by 20% per year, you still have lenders lowering their standards, and you still have them getting caught holding the bag.
I'm sorry, I just don't see it.
Not all deregulation is equal. Each individual policy has its own incentives. There are not two undifferentiated piles called "regulation" and "deregulation" that we can add and subtract from. I have a hard time seeing how the repeal of Glass Steagall did anything but mitigate the current crisis.
And yes, during the Great Depression it was small banks that were made artificially small by anti-banking laws that failed. The repeal of anti-size regulation has sound historical reasoning on its side.
Meg McArdle had a good post on this. I need to find out about her background, because she is one of about 5 people on the internet that can write INFORMED analysis of issues like these:
" Even if you ignore the economic history indicating that Glass-Steagall didn't help the crisis it was meant to solve--even if you assume, arguendo, that the repeal was a bad idea--there's simply no logical reason to believe it had anything to do with the current mess.
Securitization was not introduced in the 1990s; it was invented in the 1970s and became popular in the 1980s, as chronicled in Liar's Poker. (As an aside, if you haven't read it, you really must. Especially now).
GLB had nothing to do with either lending standards at commercial banks, or leverage ratios at broker-dealers, the two most plausible candidates for regulatory failure here.
Most importantly, commercial banks are not the main problems. If Glass-Steagall's repeal had meaningfully contributed to this crisis, we should see the failures concentrated among megabanks where speculation put deposits at risk. Instead we see the exact opposite: the failures are among either commercial banks with no significant investment arm (Washington Mutual, Countrywide), or standalone investment banks. It is the diversified financial institutions that are riding to the rescue."
Saying that Bank of America was the only company capable of buying Merrill Lynch is a mistake as is assuming it's sale was a good idea. The goal of regulation is to avoid crisis not to simplify dealing with them once the show up.
PS: Without government intervention BoA buying Merrill Lynch would have destroyed one of the few companies that would otherwise have survived this crisis without any problems.
Wachovia FELL because there was a SILENT run on the bank. More than 5 trillion dollars got taken out of the system which was largely owned by Wachovia.
Look for the day they increased the Fed Savings from $100,000 to $250,000 and you will know the preceding day was the "Silent Run".
Being right is tough, especially when you're not vindicated until years later (and after years of "success" by the new policies).
More:
"''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska."