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  • The Glass-Steagall Myth

    It has become an article of faith on the left that the 1999 Gramm-Leach-Bliley Act is to blame for the current crisis on Wall Street. Typical of the herd, George Polk Award winner Josh Marshall writes at Talking Points Memo:

    Let me get this straight. John McCain’s top economic advisor, former Sen. Phil Gramm, is the guy who authored the deregulation law that most agree is the ultimate cause of today’s financial meltdown.

    Click through if you wish, but do not expect any evidence to support the claim that “most agree” with Marshall, and do not expect any explanation as to why Gramm-Leach-Bliley is “the ultimate cause of today’s financial meltdown.” Marshall is only pushing the claim to hurt John McCain via Phil Gramm (fair enough during campaign season), but he is killing truth in the process.

    First of all, Gramm-Leach-Bliley is hardly the momentus event the left makes it out to be. The 1933 Glass-Steagal Act that prohibited commercial banks from owning investment banks, and vice versa, had been steadily weakened since the 70s by an increasingly diverse and complex new financial reality. Waivers from regulators for merger became routine and the 1998 merger between Travelers and Citigroup functionally repealed the law. Gramm-Leach-Bliley only put a de jure stamp of approval on a de facto regulatory framework.

    Second, the left has simply offered no explanation as to how the merging of commercial and investment banks caused the current crisis. In fact, the evidence so far shows that Gramm-Leach-Bliley has helped soften the blow to taxpayers by allowing commercial banks to take over trouble investment firms. Just look at which organization’s have failed:

    • Bear Stearns was an investment bank before it was sold to JP Morgan Chase (which includes a commercial bank).
    • Fannie Mae were Freddie Mac were government sponsored entities before the government bought them.
    • Lehman Brothers was an investment bank before it want bankrupt.
    • Merrill Lynch was an investment bank befor it was sold to Bank of America (which is a commercial bank).
    • AIG is an insurance company with no commercial banking division.

    Remember, Glass-Steagal was passed to protect commercial banks from failure by forbidding them from investment bank practices like trading in securities and underwriting stocks and bonds. As you can see above non of the failed institutions are commercial banks that got in trouble through risky investment banking. Instead, it is the commercial banks that are providing some stability to the system by purchasing troubled investment banks. Without Gramm-Leach-Bliley they would not even be allowed to technically do this.

    It is unfortunate that this crisis had to come along at the height of the silly season. On their more lucid days, people on the left like Josh Marshall do have a better respect for the truth than to push the utter falsehood that Graham-Leach-Bliley caused the mortgage meltdown. Hopefully after the election, no matter who wins, we can return to a civil, fact-based debate on how best to regulate financial markets.

    Meagan McArdle and  Tyler Cowen have similar thoughts.

    Posted in Economics [slideshow_deploy]

    15 Responses to The Glass-Steagall Myth

    1. George Agme says:

      Reading "the left" says this and "the left" says that hurts your case. I am on "the left" and I haven't said anything. I have been reading to understand the issues around Glass-Steagall and Gramm-Leach-Bliley. Your eagerness to blame the left has further obscured the issue. Why not just report "some say" this or that? Why not just state the facts without attribution and let "the left" and "the right" decide?

    2. Jim says:

      The Commodity Futures Modernization Act was a major factor in the financial crisis. Another of Gramm action. He snuck the 262 page it into a 11,000 appropriations bill a few hours before Christmas break. No one understood Gramm's explanation

    3. Clint, Denver says:

      Seems that this article was written a few days too early. Washington Mutual is a commercial bank that has now folded.

    4. Conn Carroll Conn Carroll says:

      Clint-

      You're poor reading comprehension skills are showing. WaMu was not bailed out by the government. It's assets were bought by JP Morgan, thereby protecting taxpayers from any liability. Without Gramm-Leach-Bliley this taxpayer money saving merger could not have happened.

    5. Carl, Warren, NJ says:

      We do now have the largest bank failure in American history, Washington Mutual.

    6. Jim McGrath, Califor says:

      It is pretty interesting to see how people carefully filter information to fit their biases. Yes, Glass-Steagall had already been weakened–under Reagan, and under the recommendation of Alan Greenspan. Yes, the Clinton administration supported the repeal. Yes, Gramm essentially wrote the bill, and sub-prime mortgages went from a $50 billion a year business to a $700 billion. Always follow the money. (Another favorite right wing ploy is to blame the entire crisis on loans to lower income folks. That was one of the tactics used to collect enough Democratic votes to make the bill veto-proof, and may have been a risky venture. But the size of the venture, under $20 billion, is dwarfed by the magnitude of sub-prime mortages, and the deregulatory language that allowed those mortages to be packaged as securities. Only Phil Gramm can be blamed for that.)

    7. Pingback: Did Deregulation Cause the Crash? : Minor Thoughts

    8. David, South Carolin says:

      Instead of supporting the de facto practices of mergers between investment banks and commercial banks…There should have been enforcement of the existing rules that were being broken since the 70s…

      This "crisis" would not be such a crisis if commercial banks weren't entangled in investment banking. Investment banking is higher risk than commercial banking, we can all agree. Allowing commercial banks and investment banks to operate in the same house allows the investment bankers to use "creative accounting" with people's deposits and create ridiculous bubbles like we see now. Bubbles which must inevitably fall.

      So yes, even though the de facto rule was that mergers between commercial and investment banks was allowed since the 70s. Passing the legislation after the fact does not excuse the practice. Ridiculous…

    9. Rick,Florida says:

      I agree with the David,North Carolina. instead of saying that it is best for investment banks and commercial banks to be allowed to be combined so that in the case that they fail they could merge, wouldn’t it be best for commercial banks not to combine with investment banks and allow for their potential to fail increase in the first place. 1/3 of commercial banks are regulated by the federal government according to the Community investment network.

    10. Jerome says:

      1. AIG insures common people's House, Car and Health.

      2. The Investments institutes managed hundreds of Billions

      up to Trillions $ of Saving institutes

      like regular commercial banks, pensions & insurances.

      e.g. Santander invested 2.1Billion Pounds at Madoff's Ponzi.

      3. There's an essential difference between allowing

      commercial banks to vest in

      "Investments"/Casino Institutes/"Banks"

      _before_ a market-failure, than after the fact,

      which is also a troubled practice,

      since many risks are still unknown,

      while the government is the natural candidate

      for clearing up the mess.

    11. Pingback: Morning Bell: A Financial Crisis of Government’s Making | The Foundry: Conservative Policy News.

    12. Pingback: Glass-Steagall: A Red Herring for the Financial Crisis | Axis of Right

    13. Pingback: The Greenroom » Forum Archive » Obama 2010: Pitchforks and Arugula

    14. Pingback: Obama 2010: Pitchforks and Arugula

    15. GGGGGGG says:

      "none of the failed institutions are commercial banks that got in trouble through risky investment banking." ….ROFL! …bubdled derivatives and hedge funds were not risky!! LMAO!

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