The Glass-Steagall Partial-Repeal Did Not Cause the Financial Crisis

[magical thyme]

18. ...

The Gramm connection

March 29, 2008 9:04 amMarch 29, 2008 9:04 am

Aha: the Politico notices that Phil Gramm, McCain’s economic guru, can also be viewed as the father of the financial crisis.

The general co-chairman of John McCain’s presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today’s economic turmoil.
http://krugman.blogs.nytimes.com/2008/03/29/the-gramm-connection/?_r=0


Repeal of Glass-Steagall Caused the Financial Crisis
In fact, the financial crisis might not have happened at all but for the 1999 repeal of the Glass-Steagall law that separated commercial and investment banking for seven decades. If there is any hope of avoiding another meltdown, it's critical to understand why Glass-Steagall repeal helped to cause the crisis. Without a return to something like Glass-Steagall, another greater catastrophe is just a matter of time....

...Yet, the fact that there were so many parties to blame should not be used to deflect blame from the most responsible parties of all—the big banks. Without the banks providing financing to the mortgage brokers and Wall Street while underwriting their own issues of toxic securities, the entire pyramid scheme would never have got off the ground.

It was Glass-Steagall that prevented the banks from using insured depositories to underwrite private securities and dump them on their own customers. This ability along with financing provided to all the other players was what kept the bubble-machine going for so long.

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis


Sorkin’s Glass-Steagall straw man
Of course its repeal contributed, directly and indirectly, to the financial crisis

But this column is even more wrongheaded than that. Here’s Sorkin (emphasis mine):

But here’s the key: Glass-Steagall wouldn’t have prevented the last financial crisis. And it probably wouldn’t have prevented JPMorgan’s $2 billion-plus trading loss. The loss occurred on the commercial side of the bank, not at the investment bank.

That’s just not right. The whole purpose of Glass-Steagall, as David Dayen notes, was to prevent commercial banks from engaging in Wall Street-style speculation.

In other words, Glass-Steagall would have prevented JPMorgan from owning Chase, but it would have also prevented Chase from making those bets. We all know now that the bank wasn’t hedging its portfolio of loans. It was using its taxpayer-insured deposits to make $100 billion bets for profit—on synthetic credit-default-swap indexes no less.

http://www.cjr.org/the_audit/sorkins_glass-steagall_straw_m.php