Glass-Steagall did not prevent LTCM Trillion dollar crisis in 1998, nor earlier S&L crisis, nor previous housing or investment bubbles. It's just a red herring, a straw man that Democrats are using and McCain wants to put his name on as yet another legislative "achievement".
And the companies that either went belly up or were about to collapse in 2008 financial were mostly not the largest integrated banks (BoA, JPM, Wells Fargo, US Bank etc.) but mostly pure commercial lending banks or pure investment banks (Countrywide, Bear Stearns, Lehman Bros., Merrill Lynch, Morgan Stanley, Goldman Sachs etc.) and, of course, insurance companies AIG (London's Financial Products Division) and LLoyds of London. The integrated banks were the ones that were called upon by government to buy these out.
G-S repeal was not the cause or even the contributing factor to financial liquidity crisis, and reinstating it is going to make things worse, not better for Wall Street and even more so for Main Street.
J.D., can you help explain to the good people in Arizona that reinstatement of G-S is only going to drain capital from commercial banks and is going to make whatever lending they can afford now even more difficult and at higher rates, and that real beneficiaries of capital outflow will be investment / hedge funds and large non-US international banks. It's too late for McCain to understand anything, but in the primaries people should be able to figure this out easily.
Big Government John strikes again!
McCain is taking the wrong approach, what should happen is either a Bank is an investment concern, or traditional banking firm, one or the other for FDIC insurance purposes.
If a bank wishes to also deal with investment vehicles the taxpayers should not be on the hook by way of insuring their losses.
Problem is mortgages can be securitized and sold to investors within 6 months and the banks no longer wanted to make money from the loan, but rather from the points and fees. Subprime loans from the GSE and CRA are distinctly delineated in the portfolio, thus the investor can take note of it before he buys the portfolio. The biggest killer was the so call good conventional loans that were suppose to be vetted by the banks, where the the loan applicant lied about his income and qualification at the encouragement of the mortgage bank whose main goal was collect fees from the largest number of loans originated and selling it off to investors (after Moody is threaten by the bank for asking for the loan data for analysis and relent giving high risk portfolio a AAA rating to preserve future business from the banks) and leaving them holding the bag when the bad loans manifest. This is the chokepoint of the fraud and malfeasance by the banks. We do not need more regulations, we need more investigations and prosecution of mortgage orginators, loan applicants, mortgage managers and management as well as Moody and the rating agencies.
And your proposal to clean up the mess that is Citibank is...?
Remember for McCain it can't be just a legislative "achievement", it has to be a bipartisan legislative "achievement".
Putting Glass-Steagall back into play is one of the several changes that are required in order to fix this mess. Increasing the capital reserve requirements for banks is another. Requiring people actually be able to repay the mortgages is another. Along with significant reversal of the community reinvestment act.
However, you are correct in that in the short term, it can work against an economic recovery as banks adjust to the legislation. However, if there is a period of time spanning several years, and changes are made in incremental steps, then the finance industry can be restructured to the way things were in the 80’s with less risk taking in the whole market place.
Of course, none of this will do any good if the government keeps spending us into a pauper state.
I propose that all legislatures be required to take a course in economics, with refresher courses each term in office. If they fail to take such courses, there will be withheld 2/3rds of their salary.
This is GREAT news.
Sorry guys, I disagree with you. A big part of the financial crisis has been caused the “derivatives” or bets against America, especially the mortgage sector, made by the financiers, especially AIG, and others that followed their lead. One of the reasons the banks can’t/won’t lend is that they have these “bets” still hanging over their heads that could be called due. We can’t call this “insurance” because insurance is a highly regulated industry, for good reason. But insurance it was, with nothing required to make sure you could make good on what your were insuring. Financiers bought the bad loans on purpose, knowing they were bad, and immediately put this now legal “insurance” on them. Banks gave the insurance for the premiums, but didn’t have the money to really insure them. This never should have been made legal.
This was made legal when Glass-Steagall was repealed by Bill Clinton. Ayn Rand be d***ed. This was a good law and needs to be reinstated. Or, shall we “deregulate” insurance too? You might not like the results when your home burns down.
The best regulation for these banks should be a permanent ban on all bailouts. If the banks know there is not going to be a safety net, then that is one more economic incentive to be more careful in their practices.
bump
I agree with the idea, I distrust the scum proposing it.
Did Deregulation Cause the Financial Crisis?
While many regulators may have been shortsighted and over-confident in their own ability to spare our financial markets from collapse, this failing is one of regulation, not deregulation. When one scratches below the surface of the “deregulation” argument, it becomes apparent that the usual suspects, like the Gramm-Leach-Bliley Act, did not cause the current crisis and that the supposed refusal of regulators to deal with derivatives and “predatory” mortgages would have had little impact on the actual course of events, as these issues were not central to the crisis. To explain the financial crisis, and avoid the next one, we should look at the failure of regulation, not at a mythical deregulation.
http://www.cato.org/pubs/policy_report/v31n4/cpr31n4-1.html
Banking deregulation of restrictions on branching and interstate banking lifted a set of constraints that had prevented better-run banks from gaining ground over their less efficient rivals. Big changes in the banking industry followed deregulation: many acquisitions and consolidation, integration across state lines, and a decline in the market share of small banks.
These changes allowed banks to offer better services to their customers at lower prices. As a result, the real economy – “Main Street” as it were – seems to have benefited. Overall economic growth accelerated following deregulation, and this faster growth seems to have been concentrated among new businesses. Sometimes we think that higher returns necessarily bring higher risk. But in the case of banking deregulation, volatility of the economy declined as growth went up.
http://fic.wharton.upenn.edu/fic/papers/02/0239.pdf
On How to take moral hazard out of banking
http://www.ft.com/cms/s/0/50664eb8-dfaa-11de-98ca-00144feab49a.html