Sunday, July 4, 2010

Finally, An Explanation For Returning To Glass-Steagall That Makes Sense

FLG was just watching Nouriel Roubini on CSPAN. He thinks repealling Glass–Steagall was a mistake and wants to reinstate it. Unlike so many other people he had an explanation that made sense.

The gist:
The financial supermarket model (also called a universal bank) offers little benefit from economies of scale, but is extremely difficult to run well. In fact, Roubini argues it's simply too complicated to run safely. His prescription is to have financial firms that specialize in various financial products, just like we used to have. Commercial and investment banks. Insurance companies. etc. This would be where FLG usually points out that financial innovation has created hybrid products that span these old separate businesses. Roubini anticipated this, even though FLG wasn't even there and it was filmed months ago, and states that financial innovation is overrated. Recent innovations offered little economic or social benefit. Therefore, it's best just to have a simple, old-fashioned financial system that everybody can understand.

FLG disagrees that financial innovation is worth forgoing and wonders if locking in the idea of a financial system that never really changes that much is a good idea, but this argument at least makes sense and Roubini is, unlike most people who FLG hears call for reinstating Glass-Steagall, completely aware of the trade-offs involved.

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