Monday, July 30, 2012

Let’s Shatter the Myth on Glass-Steagall

Steve Pearlstein does an awesome job of slaying clueless mainstream reporters. It would be too much to expect him to explain the role of the Federal Reserve in printing money as the ultimate cause of the financial crisis, but he does get what most don't, that Glass-Steegal had nothing to do with the crisis. Read this and become the most knowledgeable person in your neighborhood about Glass-Steegal and the financial crisis:

You can blame Aaron Sorkin for this column.

I was watching “The Newsroom” last week, the latest hit show by the producer and screenwriter, when the brainy-but-beautiful economics correspondent for the fictional cable news network was explaining to her gutsy-but-impulsive executive producer how the world’s financial system recently came to the brink of collapse.

“So after the Great Depression, Congress wanted to put a firewall between the [banks and the] investment banks. They wanted to make sure that Wall Street could melt to the ground and the commercial banks wouldn’t be touched. They passed a law, the Glass-Steagall Act. Now you could be Gordon Gekko [tycoon in the movie “Wall Street] or George Bailey [small-town banker in the movie classic, “It’s a Wonderful Life”], but you couldn’t be both.”

Then, explains the brainy-but-beautiful correspondent, Ronald Reagan launched a two-decade push toward deregulation, which culminates in the repeal of Glass-Steagall in 1999. Suddenly, Gordon Gekko could make risky bets with George Bailey’s deposits, and the rest, as they say, is history.

It was vintage Sorkin: eloquent, fast-paced dialogue that perfectly channels the liberal political/cultural zeitgeist, transforming what appears to be a complex story into a simple morality play.

The only thing is, it’s not true — not even close. Yet it has been repeated so many times — on PBS and NPR, in the liberal blogosphere, on very-serious Op-Ed pages, in an Oscar-winning documentary — that whenever I give a talk to a group of college students about the financial crisis, the first question predictably is, “Yeah, isn’t it all really about the repeal of Glass-Steagall.”

It’s not just students, however. Paul Volcker, the former chairman of the Federal Reserve, surely helped to validate the Glass-Steagall fable with his fixation on a new rule barring banks from using their own capital to speculate in securities. And British regulators are considering a proposal to put a fence around their banks. Then, just last week Sandy Weill — who flouted Glass-Steagall in creating today’s Citigroup before Congress finally repealed it — even the wily Weill said the old law should now be reinstated.

Repeal of Glass-Steagall has become for the Democratic left what Fannie Mae and Freddie Mac are for the Republican right — a simple and facially plausible conspiracy theory about the crisis that reinforces what they already believed about financial markets and economic policy.

But why let facts get in the way of a good screenplay?

Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.

The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.

Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.

Read more here.


  1. What am I missing? Why does everyone talk about the repeal of Glass-Steagel? Glass-Steagel created the FDIC and the FDIC is still very much in existence. As I understand it, it was only a small part of that bill that was repealed by Graham-Bliley in 1999.

    And I love how the screen-writer insists on putting the blame for repeal, which happened under Clinton, onto Reagan because Reagan started de-regulation except that the de-regulation that he is referring to (minimal as it was) actually started under Carter. He just can't bring himself to blame a liberal.

    Whenever I get into a discussion about this, I ask my adversary to explain how keeping Glass-Steagel in full effect would have prevented the financial meltdown. So far I haven't found anyone who can give a reasonable explanation.

  2. are sub-prime mortgages not just another form of risky investment made by the banks?

    where did the money for all those risky loans come from? can we be certain they were not from the commercial coffers of these banks (wamu, wachovia, bank of america)?

    also, don't forget the other major commercial banks like citi also needed major bailout money. just because they didn't fail doesn't mean they weren't in big trouble from risking commercial banking assets to back their investment banking ventures.

  3. I saw this episode of "The Newsroom" the article is about. I literally had the exact same reaction this article speaks about when I was watching the show. I wanted so badly to say how wrong the show was about Glass-Steagall, thank god this article did it for me.