Gramm of Truth
Tyler Cowen (and Brad DeLong) exonerate the repeal of Glass-Steagall. General thesis: Gramm-Leach-Bliley was not a major contributor to the housing bubble and the securitization of bad debt, and right now, the end of Glass-Steagall leaves more landing zones for troubled companies.
Comment by mds —
September 19, 2008 @ 9:25 am
Well, Comment #1’s perfect summary is a hard act to follow, but oh well.
(1) Glass-Steagall repeal has not been a major factor so far in this latest crisis, but it’s important to keep such analyses from letting Gramm of the hook:
So Phil “Nation of Whiners” Gramm managed to be almost singlehandedly responsible for CDO madness. Coming on the heels of the “Enron loophole” that kept the feds from oversight of Enron’s electronic energy trading, that’s a pretty impressive record.
(2) Glass-Steagall could still bite us, especially given that its stepchild in the Federal Reserve Act has been suspended:
Now, I’m no economist, but it seems the takeaway is that institutions with both depository and investment banking activities can use their commercial bank funds to cover losses on the investment banking side. No such transfers would be possible (or necessary) if commercial and investment banking were still separated.
On the bright side, we didn’t have FDIC back in the Depression. So we might no longer forbid banks from paying gambling debts with their depositors’ money, but at least taxpayers will cover any resulting shortfalls caused by the affiliates.
Comment by mds —
September 19, 2008 @ 9:57 am
Oh, great, the comment spam is gone. Now everyone’s gonna read that bit about Comment #1 and think I’m a loony.
…What?
Comment by Jim Henley —
September 19, 2008 @ 9:59 am
Well, you’re a loony!
Actually, I nuked the comment spam. Sorry.
Everyone! mds is not a loony! There used to be a comment #1 that was spam.
Comment by Hal —
September 19, 2008 @ 10:53 am
I’d just like to note that there is no “exoneration” of GLB anywhere in this circular link chain. All that is said is a simple assertion that GLB isn’t to blame and then a far, far longer discussion about how great it is that we have GLB because it allows us to do things that may have cause the problem in the first place.
Lacking actual discussion of the points which actually exonerate GLB, this is simply circular reasoning.
Aren’t you glad we have nuclear bombs to nuke Iran so we can keep them from getting nuclear bombs?
Or hey, aren’t you glad we can preemptively invade a country that doesn’t threaten us so that they can never develop the capability to preemptively invade us because we threaten them?
Amazing.
Comment by joe from Lowell —
September 19, 2008 @ 11:51 am
This is like the “thank God we stayed in Iraq to fight AQI” argument.
Yes, Glass-Steagal repeal allowed banks to pick over the corpses of investment houses. Yes, the Iraq invasion allowed US forces to fight al Qaeda in Iraq.
So, how’s we end up with an al Qaeda-linked force operating in Iraq? Oh, right, our invasion and overthrow of the government and policy of not providing adequate security in the aftermath.
So, how’d those investment houses end up in the gutter? Oh, right, shady transactions involving mortgage derivatives, which the bill repealing Glass-Steagel allowed to happen.
Comment by max —
September 19, 2008 @ 2:16 pm
I think it is most accurate to say that removing Glass-Stegall did not itself precipate a crises, but removing it was a prerequisite to creating one.
max
['Plus everything else MDS said.']
Comment by Iron Lungfish —
September 19, 2008 @ 2:41 pm
I generally find Cowen and Delong to be consistently obtuse on these sorts of things.
Comment by Avram —
September 19, 2008 @ 4:23 pm
Well, do we even know that the housing bubble was caused by human activity? Don’t discount the possibility that it’s a natural cycle, and the effects of bovine flatulence!
Comment by Anon —
September 19, 2008 @ 10:41 pm
The linked posts aren’t very convincing. The issue, I would think, is whether the repeal of Glass-Steagall accelerated/encouraged reckless financial activity involving mortgage backed securities. I don’t see how it is a defense of GLB to claim that none of the firms that have failed (to date) were hybrid entities. After all, hybrid entities — because they could use their commercial sides to prop up their investment sides — would naturally be expected to weather storms for longer. But that doesn’t mean they won’t eventually fail, nor does it mean that the crisis for the non-hybrid banks wasn’t the result of pressures created by removing the commercial/investment wall.
Anon
Comment by Jon Hendry —
September 19, 2008 @ 11:51 pm
I get bad feelings about the future of BofA, now that it’s loaded up on both Countrywide and Merrill Lynch.
Especially consider the new rule change allowing BofA to use depositor funds to shore up the investment banking activities.
Comment by Anon —
September 20, 2008 @ 1:59 am
Incidentally, Cowan links to a comment by Ex-Worker at Mark Thoma’s site that does seem to address my comment. The problem is that Ex-worker’s comment is basically that the creation of Microsoft Excel made the housing crisis inevitable. Sure, that’s a (very slightly) facetious reading, but the notion that technology makes regulation irrelevant seems to me to be a specious one. Rather, the fast pace of technological development suggests that regulation based on constraining the use of technology is bound to fail. But it doesn’t seem like most of the regulation being discussed (whether Glass or Gramm) was intended to do that.
Anon
Comment by b-psycho —
September 20, 2008 @ 4:51 pm
Shorter couple of Misoids:
“Tight money > Loose money.
But if you insist on Loose money, then
Loose money w/ Glass-Stegall > Loose money w/o it, admittedly.”
Never would’ve expected a there’s-a-right-way-to-do-anything type comment from them. Odd, yet they have a point. If its concluded that there is going to be political manipulation, period, and no discussion about getting rid of it will ever be taken seriously, then it only logically follows some attempt at limiting the fallout should be made.
Comment by BrianM —
September 21, 2008 @ 1:23 pm
Are conglomerates now back in favor? I thought the stockholders (= owners) were in general better served by more, smaller, more specialized companies. How do the synergies of financial conglomerates (depositors’ money can bail out the rocket scientists!) benefit the shareholder?