Tuesday, November 1, 2011

‘Repeal’ of Glass-Steagall Irrelevant to Financial Crisis

Tom Woods has a great piece out on why repeal of the Glass-Stegall Act had nothing to do with the recent financial crisis.

Among Tom's key points:
The “repeal” involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank...

When we recall that stand-alone institutions, both commercial and investment, also failed during the crisis, and that all of them acquired mortgage-backed securities (which they had always been allowed to do, by the way), the Glass-Steagall “repeal” looks more and more like a red herring that appeals to people whose belief system requires them to find some way a Fed-fueled bubble could have been stopped had the right regulatory structure been in place...

Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation — namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) — than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant.
Read his full discussion, here.


  1. With the caveat that I haven't read Woods' piece and will now go and do that, it was not the failure so much as the size of the institutions that failed for whicht the repeal is blamed. That's how we got "too big to fail."

  2. The fact that Forbes is supporting the repeal and also believes that the banks were correctly rescued says it all.

    And Forbes is a Cain supporter, right?
    And Byrne, who knows the nitty-gritty of the financial history, and is in favor of G-S, is a Paul supporter.

    Not sure what that says, but it says something.

  3. I'd like to know: which specific banks are liberals complaining about when they put the blame on Glass-Steagall's repeal? If merging operations with an investment bank is such slick way to earn a profit, why didn't ALL banks do it? And while I'm at it, why not just let the big monstrosities fail when the Fed could have just "injected liquidity" into the surviving banks to prevent the supposed horror of deflation?

  4. @evan,

    Not a liberal at all. Plenty of people who are not liberals support G-S.

    Agreed that by itself reinstatement is not sufficient and that there are plenty of other subsidies to the housing industry from mortgage interest write-offs to the GSE's and the rest that need to be undone, but I think the issue is size and how that provided the justification for bail-outs.

    It's a tactical start and not the end all and be all.

    You cannot look at this only from an ideological perspective. It's much more a matter of organizational theory.

    The fundamental causes are cheap money and various interferences in the market process, fine. But we have to start somewhere...

    Radical strategies and goals are all very well but radical tactics can backfire when the entire system is so heavily laden with subsidies and intervention anyway.