Wednesday, January 27, 2010

Andrew, Maybe You Missed This

...because it was buried at the bottom of the post:
Andrew Stevens, you haven't said anything on this front. What's your take on Glass-Steagall and banking reform?

I find it doubtful that you have no thoughts on the matter.

1 comment:

Andrew Stevens said...

I did miss it. I certainly agree with you that Glass-Steagall played no real role in the economic crisis of 2008. I'm not even sure what the argument is that it did. Citigroup got involved in investment activities and lacked the expertise and somehow screwed up the economy by doing so? It seems to me that any problems caused by the investment activities of Citigroup and Bank of America paled in comparison to the investment activities of the straight-up investment banks (Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley), which would have happened even if Glass-Steagall had still been in place. And plenty of commercial banks which were not involved in investment banking failed - e.g. WaMu, Wachovia, IndyMac. Without Glass-Steagall, it was possible to rescue some of the investment banking firms via private action (e.g. Chase rescued Bear and Bank of America rescued Merrill Lynch) so at least prima facie it seems like the repeal of Glass-Steagall helped rather than hurt.

I have always assumed that the argument about Glass-Steagall was purely politically inspired - an attempt to lay the blame at the feet of Phil Gramm while he was helping John McCain and for no other reason. However, Paul Volcker and Joseph Stiglitz have resurrected the argument that Glass-Steagall should be restored, not that the Obama Administration is taking them seriously, and I can't dismiss them out of hand like I can Elizabeth Warren (or, for that matter, Barack Obama) and the other partisan hacks who made the argument in the heat of the election campaign.

However, I think Volcker's idea is that we'd separate commercial from investment again and the government would guarantee commercial banks, but not investment banks, which seems like a sensible idea. But ultimately this seems implausible to me since the failure of the investment banks is just as critical as the failure of commercial banks. It was when Paulson refused to rescue Lehman Brothers that the crisis went to Code Red. It seems very questionable that any future administration would allow a big investment bank to fail in a similar sort of crisis regardless of whether it had depositors.

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