Wednesday, Oct 21, 2009
Actually, separating commercial banks from investment banks isn't such a good idea
Marginal Revolution: Glass-Steagall: The Real History
Many wise people are now recognizing that the repeal of Glass-Steagall was one of the few saving graces of the current crisis. Let's thank President Clinton for that wise bit of deregulation. For example, national banks with security affiliates were much less likely to fail than banks without affiliates. The separation of commercial and investment banking increased the cost of external finance. Most of all, repealing the Act enabled financial diversification and thus it paved the way for a number of mergers. It made it possible for JP Morgan to buy Bear Stearns and for Bank of America to buy Merrill Lynch. [This blog is written by two US economics professors, albeit in September 2008 before the big bailouts in November.]
Posted by drewster @ 08:30 PM (447 views) Add Comment
3 Comments
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1. drewster said...
Also see the linked article: Marginal Revolution: Did the Gramm-Leach-Bliley Act [which repealed Glass-Steagal in 1999] cause the housing bubble? No.
2. quiet guy said...
Interesting post, Drewster. Having been a cheerleader for legislation similar to Glass-Steagall on this blog, your post leaves me wondering where now? I have no doubt that attempts to prevent another banking failure by government regulation are futile which is why I believe that we should be preparing our financial infrastructure to deal with the next 'event' without a bailout.
3. drewster said...
quiet guy,
If there's one thing I've learned from years of watching this slow-motion train wreck, it's that the "experts" are often wrong. So although these two articles are written by economics professors, with citations etc., that doesn't necessarily mean they are right. In particular when it comes to analysing failed banks, the sample size must presumably be quite small. Also these posts date back to September 2008, before the really big bailouts happened (if I recall correctly). The authors might have changed their tune since then.
I'm about to post another article which is very much pro-Glass-Steagal....