Yglesias: Glass-Steagall Is Mostly A Red Herring
Mathew Yglesias argues that "Glass-Steagall is mostly a red herring":
Glass-Steagall Is Mostly A Red Herring, by Mathew Yglesias: Something I’ve heard from participants in the 99 Percent Movement is a revival of interest in rescinding the repeal of the 1932 Glass-Steagall Act. I think this is largely a misunderstanding...
First off, what did Glass-Steagall do? Well it did a number of things (like establish the FDIC) that were never repealed. But the rule that was repealed in the 1999 Gramm–Leach–Bliley Act were restrictions on the same holding company owning a bank and owning other kinds of financial companies. The thing about this is just that there’s really nothing in particular about co-ownership that you can point to as having been a problem in the financial crisis. And if anything that fact seems to indicate that the repealers were right to think there’s no special problem here — even in a huge financial crisis combined financial firms worked no worse than other kinds. ...
I am sympathetic to this point of view, i.e. that the elimination of Glass-Steagall wasn't an important causative factor in the crash. However, as I said a few days ago:
There is a debate over the extent to which removing Glass-Steagall -- the old version of the Volcker rule -- contributed to the crisis. However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it's clear that it has for the reasons outlined above.
So there's still a reason to reinstate some version of the rule even if it wasn't the main problem in the banking sector this time around.
Posted by Mark Thoma on Monday, October 17, 2011 at 05:04 PM in Economics, Financial System, Regulation |
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