Repeal didn't cause the Financial Crisis of 2007

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ℹ️ Info

~ Aristotle Sabouni
Created: 2022-03-11

If Glass-Steagall prevented catastrophe, why didn't Asia and Europe have financial meltdowns first? (They never had Glass_Steagall)
Banks were less leveraged (risk) after the repeal of Glass-Steagall than before -- so Glass-Steagall hadn't reduced risk (leverage)
Transparency wasn't a problem, as everyone knew what was going on with individual transactions (micro). The problem was few were looking at the bigger picture (macro).
Adding/removing steps wouldn't change anything material
Regulations had increased after the repeal of G-S, by over 17%, with thousands of pages of new regulations (so it wasn't de-regulation)
If removing Glass-Steagall was the problem, then the collapse would have been because of overleverage or bad behavior in the unified banks. But in 2007, the Unified banks outperformed both the Commercial banks (Countrywide) and the Investment Banks (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns). The Unified banks bailed out the others.
- JP Morgan Chase (Unified) bailed out Bear Stearns (Investment)
- B of A (Unified) helped by taking over Merrill Lynch (Investment) and Countrtywide (Commercial).
- This is backwards from what GST says should have happened!

This has been widely researched, after a few bad books and articles promoting this G-S theory. Bill Clinton, the CBO, the SEC, and dozens of other economists all concluded the same thing: Glass-Steagall had nothing to do with the crisis, or the credit freeze

More[edit | edit source]

Europe and Asia had never had Glass-Steagall! That's why it was removed. American banks were having to compete with European and Asian banks on an uneven field; they had Unified banks and we didn’t. We had an extra layer, and less services and lower returns than if they had tighter coupling). And none of those banks had a problem in the 66 years between G-S and American repeal of it. If it was protecting us, why hadn't they had problems?
Most banks didn’t unify (most stayed separate), and if Glass-Steagall was the problem, then during the collapse it would have been the unified banks that had the biggest problems (over-leveraged/under-capitalized). It wasn’t. The Unified banks outperformed the Commercial banks (Countrywide) and the Investment Banks went out of business (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns). The Unified banks that never had problems; JP Morgan Chase (Unified) bailed out Bear Stearns (Investment), while B of A (Unified) helped by taking over Merrill Lynch (Investment) and Countrtywide (Commercial). This is backwards from what GST says should have happened!
Transparency inside banks hasn’t been a problem, so inter-bank transfers didn’t help (there wasn’t a problem here).
Adding or removing a step, didn’t alter what happens. One way bank (a) talked to bank (b) to do your trades — the other way bank has dept. (a) talk to dept. (b) and does the trades. But nothing changed except overhead.
There’s no difference in leverage (either by them or you). They had the same incentives either way, as did you. There’s no advantage to the customer for having an adversarial relationship between banker and securities broker.

Not only that, studies concluded GS had done nothing to help in the Depression, and research into the debates from the era demonstrate it was passed based on complete bullshit, even for the time. It wasn’t economics but flim-flam. It was always a confidence scam to dupe the public into thinking the politicians had done something to make banking safer. But even back then, the people at the time knew, passing it was bullshit. There’s just some that bought into the lie so hard that they refuse to learn this to this day.

No one has ever adequately explained how removing GS could cause a bubble or the credit markets to freeze, or how GS could have stopped the bubble, let alone why investment or commercial bankers would knowingly shoot themselves in the foot, why politicians would let them get away with it (if crimes were committing, prosecuting them would get them fame/votes), and so on.

They usually stop at step 1 — which is that leverage helped inflate the bubble and that eventually popped. OK. But Universal banks weren’t the problem, and how did the credit crunch happen? How did loaning them money fix it? And so on — they want to stop here, because everything else proves that their theory is more political than historical.

Deregulation[edit | edit source]

Not only that, In 1997, there were 23,422 restrictions on the industry (banking/finance), a level that increased to 26,235 (up 17%) by 2008. So there was no deregulation, only increases in regulation.

On top of that, the pure number of regulations doesn’t fully quantify how much larger and more complex regulation has gotten over time. Dodd-Frank for example is 22,000 page alone.

Those claiming deregulation are ignorant about history and congress (which is continuously writing new laws, and very rarely repealing old bad ones).

There might have been mistargeted regulation (meaning a failure of regulation), but there was no deregulation that allowed this to happen.

🔗 More

Financial crisis of 2007-2008
What caused the financial crisis of 2007-2008? This explains various theories.

Glass-Steagall
Glass-Steagall was the 1930's new deal regulation that separated Commercial and Investment banks. That is all.

Tags: Financial crisis of 2007-2008/all Glass-Steagall/all