As The Wall Street Journal has recently noted, the Republican and Democratic Party platforms don’t agree on much, but one very prominent agreement is that they both call for the reinstatement of the Glass-Steagall Act of 1933, the law that separated commercial banking and investment banking, and was finally repealed by a law signed by Bill Clinton in 1999. The stalwarts of the left are pushing this reinstatement, led by Bernie Sanders and Elizabeth Warren, who are obsessed with the notion that its repeal opened the floodgates for all kinds of chicanery that led to the crash of 2008. Why the Republicans signed on is part intimidation and part pandering to the Sanders supporters, but misguided in any case. Why? Because there is no evidence that the absence of Glass-Steagall had anything at all to do with the crisis of 2008.
The primary culprit was bad Federal Reserve monetary policy, which, as I have written many times, was responsible for the misallocation of capital to bond issuers at the expense of small business, and to the misguided “affordable housing” frenzy driven by Fannie Mae and Freddie Mac, which together hold over 50% of U. S. residential mortgages. And these problems remain, untouched by the Congress in any meaningful way. So the right fix is for the Federal Reserve to be forced to return to its founding mission and to privatize Fannie and Freddie; the demagoguery on Glass-Steagall is a solution in search of a problem.