Glass-Steagall

Glass-Steagall was the 1930's new deal regulation that separated Commercial and Investment banks. That is all. Glass-Steagall was the 1930's new deal regulation that said Commercial and Investment banks had to be separated. There would be no "universal" banks (that did both). In theory, by separating sides there would be more transparency, and people might behave less risky. In truth, there's just more inefficiency and the same risk. ℹ️ Info           ~ Aristotle Sabouni Created: 2017-05-15

What is Glass-Steagall?

           Main article: Glass-Steagall/What is Glass-Steagall?

Glass-Steagall was the 1930's new deal regulation that said Commercial and Investment had to be separated. There would be no universal banks (that offered both services). The theory was that consumers were easily confused by the differences and so didn't understand the risks they were taking, and this would prevent banks from deceiving the public -- since they'd know the difference between walking into one kind of bank or the other. There's an added layer of abstraction whereby requiring Commercial Banks to transact with Investment banks to do certain things, there was more transparency (governments could audit those two companies transaction). Because of those transactions (between the two types of banks), there's more waste (two companies get a piece of the transaction instead of one in universal banks), but there’s theoretically less conflict of interest (investment is looking out for equity, and commercial is looking out for cashflow, and somehow this helps consumers). So in their theory, there are lower returns (more waste), and thus lower risks. In truth, there’s just more inefficiency and the same risk. Added steps don't make us safer.

Why add or end it?

           Main article: Glass-Steagall/Why add or end it?

The New Deal was about increasing waste/bureaucracy and employing more people, not reducing costs or improving quality. The Keynesian economic theory theory (long disproven) was that by making things less efficient (requiring more people to do the same job, and injecting bureaucracy), that you employed more people, gave them more money, so more people were better off. This is called the broken-window fallacy in economics (seen benefits matter, hidden costs do not); it is wrong and rebuked in economic circles, but it plays well in the political and media spheres. We also know Glass-Steagall didn’t do anything valuable": which was why no other country had it, and why it was removed bipartisan support.

Glass-Steagall Theory (GST)

           Main article: Glass-Steagall Theory (GST)

The idea is the Financial Crisis of 2007-2008 was caused by: Bill Clinton lifted the Glass-Steagall act (under pressure from Republicans) and signed the bipartisan Gramm-Leach-Bliley Act (GLBA) This allowed banks/investment houses to merge and over-leverage themselves (using Credit-Default Swaps, and MBS’s) and rampant predatory capitalism of evil bankers caused them to oversell loans to people that people couldn't afford them (subprime mortgages) and get into over-leveraging themselves The bankers knew they were risking all (and going to crush the economy), thus they were actively defrauding the people by selling/making the loans (criminal activity to get their bonuses), and they should go to prison. The bubble popped, and everything came down (as expected), but they all got bail-outs / cash from Uncle Sam and consumers paid the bills ($700 billion for TARP AND $831B for ARRA / American Recovery Reinvestment Act / Stimulus), and they walked away scott-free with big bonuses. To these folks, it was collusion between the the Fed and Banks that allowed crimes to be committed and not punished, the little guy got screwed and got their homes taken away, and because Big-Government did nothing, thus we need Bigger-Government and wealth-redistribution to fix it and go after these crooks and evil 1%’ers. (This is the Occupy Wall Street theory). It's a great theory to appeal to emotions (it lets the politicians blame everyone but themselves), but none of it makes sense or fits the facts/evidence, or really explains anything. And it's been discredited by the evidence.

Flim-Flam

           Main article: Glass-Steagall/Flim-Flam

If you're on the wrong side of history, and the truth proves it, what do you do? Politicians (Democrats) lie, distract, or attack. So rather than look at things that will fix it, they scapegoat their favorite demons: Capitalism: as if borrowing/loaning money and private ownership was the problem. Greed/overleverage (when leverage was less than before) Under-regulation/de-regulation when there were more regulations after elimination of Glass-Steagall than before. Unified Banks: which all other countries had, and outperformed commercial or investment. Republicans: who were warning about problems with Fannie-Freddie and other things for decades.

Repeal didn't cause the Financial Crisis of 2007

           Main article: Glass-Steagall/Repeal didn't cause the Financial Crisis of 2007

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!

If you have any better explanations that you’ve read, let me know and I’ll look into them and debunk them as appropriate. But all of them have been variants of that hole-riddled self-contradictory theme.

---

🔗 More

Economics The study of choice, scarcity, Social reactions to policies, and unseen consequences.

Terms We need to agree on what terms mean. This used to be easy, before SJW's/Marxists started Orwelling our language.

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

Financial Terms These are a bunch of financial terms (concepts really), that you can scan to get familiar with the jargon and ideas.

🔗 Links

• http://www.sjsu.edu/faculty/watkins/subprime.htm
• http://www.occ.gov/news-issuances/federal-register/94fr9214.pdf - Smoking Gun: the Clinton CRA policy (1994) creating an Interagency Task Force on Fair Lending, that demanded lower standards to prevent red-lining (rejecting high credit risks) and would crack down on any banks that didn’t comply.

Tags: Economics  Terms  Crisis  Financial Terms