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of the Glass-Steagall Act of 1933, the law that separated commercial banking and investment banking, and was finally repealed by a law signed by Bill Clinton in 1999.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.
Jim,
I really enjoy reading your insightful thoughts in the “Pilgrim”, and agree with you completely on this subject. I would also be interested in knowing your thoughts on the risk that the big banks are taking in the derivatives market.
My best,
Tom Pagel
What ever happened to the massive numbers of intellectual voices who used to serve as policy rudders for suppressing lies about topics like Glass-Steagall?
The fertilizer for political spin doctoring is the absence of such voices. Your voice of reason seems so isolated.
In 1995 I sponsored a luncheon at the Confederate House attended by Sonny Sowell, Jot Hodges, Cary McNair, Dugan Hill, and two others that I can’t recall. Our speaker was a money manager from London, who also had offices in Arlington, Va. One of his statements comes to mind when you speak of Glass Stegal. He stated that the thing that had kept the US a financial leader in the world was the separation of commercial banking and investment banking. Once they are combined, they rule and that was the rest of the world. In 1999 after Glass Stegal was repealed, I wrote Phil Graham (a strong supporter if repeal) and advised him that he had put the nail in the coffin of our financial leadership in the world. It took a few years to come about, but there’s no question in my mind that the repeal of Glass Stegal allowed the commercial banks to bundle mortgages and sell the bundles through the investment banks. In other words, I think your take on it is a bunch of s###.