Chris
11-20-2012, 05:27 PM
Liberals like to blame the repeal of Glass-Steegal for the economic crisis. But this is based on misundertanding what it was and what happened.
Myth 1: Glass-Steagall was repealed in 1999 by the Gramm-Leach-Bliley Act.
No. Glass-Steagall was never repealed. It is still applicable to insured banks and forbids them from underwriting or dealing in securities. What was repealed in 1999 were the sections of Glass-Steagall that prohibited insured banks from being affiliated with firms—commonly called investment banks—that engaged in underwriting and dealing in securities.
Myth 2: The repeal of Glass-Steagall allowed banks to use taxpayer-insured funds for risky trading.
No. The portions of Glass-Steagall that remained in effect after 1999 prohibited insured banks from underwriting or dealing in securities. However, before and after 1999, banks were permitted to trade (that is, buy and sell) bonds and other fixed-income securities for their own account....
Myth 3: In the financial crisis, banks got into trouble by trading “risky” mortgage-backed securities (MBS).
No. Insured banks got into trouble in the financial crisis by buying and holding MBS backed by subprime and other low-quality mortgages, not from trading these instruments. When these loans declined in value in 2007, they caused significant losses to the banks that had invested in them. This is the same thing as saying that banks got into trouble by making bad loans, but it has nothing to do with Glass-Steagall or its supposed repeal....
Myth 4: The repeal of Glass-Steagall allowed bank holding companies and bank-affiliated investment banks to use insured funds for risky trading.
Very unlikely. The 1999 change in Glass-Steagall allowed insured banks to be affiliated with investment banks, which could indeed take substantial risks in underwriting, dealing, and trading securities of all types. Investment banks—even those affiliated with insured banks—have no access to insured deposits. Moreover, banking regulations make it extremely difficult for insured banks to lend funds to, guarantee, or otherwise assume or support the risk-taking of their affiliates....
Myth 5: By allowing insured banks to affiliate with risk-taking investment banks, the 1999 change in Glass-Steagall caused losses to the banks that contributed to the financial crisis.
No. As noted above, insured banks suffered losses in the financial crisis by making bad loans—that is, buying and holding MBS based on subprime and other low-quality mortgages.....
I probably cut out too much but you can read all # Five Myths about Glass-Steagall (http://www.american.com/archive/2012/august/five-myths-about-glass-steagall).
Or read @ Let’s shatter the myth on Glass-Steagall (http://www.washingtonpost.com/lets-shatter-the-myth-on-glass-steagall/2012/07/27/gJQASaOAGX_story.html):
...“So after the Great Depression, Congress wanted to put a firewall between the [banks and the] investment banks. They wanted to make sure that Wall Street could melt to the ground and the commercial banks wouldn’t be touched. They passed a law, the Glass-Steagall Act. Now you could be Gordon Gekko [tycoon in the movie “Wall Street] or George Bailey [small-town banker in the movie classic, “It’s a Wonderful Life”], but you couldn’t be both.”
Then, explains the brainy-but-beautiful correspondent, Ronald Reagan launched a two-decade push toward deregulation, which culminates in the repeal of Glass-Steagall in 1999. Suddenly, Gordon Gekko could make risky bets with George Bailey’s deposits, and the rest, as they say, is history.
It was vintage Sorkin: eloquent, fast-paced dialogue that perfectly channels the liberal political/cultural zeitgeist, transforming what appears to be a complex story into a simple morality play.
The only thing is, it’s not true — not even close. Yet it has been repeated so many times — on PBS and NPR, in the liberal blogosphere, on very-serious Op-Ed pages, in an Oscar-winning documentary....
Myth 1: Glass-Steagall was repealed in 1999 by the Gramm-Leach-Bliley Act.
No. Glass-Steagall was never repealed. It is still applicable to insured banks and forbids them from underwriting or dealing in securities. What was repealed in 1999 were the sections of Glass-Steagall that prohibited insured banks from being affiliated with firms—commonly called investment banks—that engaged in underwriting and dealing in securities.
Myth 2: The repeal of Glass-Steagall allowed banks to use taxpayer-insured funds for risky trading.
No. The portions of Glass-Steagall that remained in effect after 1999 prohibited insured banks from underwriting or dealing in securities. However, before and after 1999, banks were permitted to trade (that is, buy and sell) bonds and other fixed-income securities for their own account....
Myth 3: In the financial crisis, banks got into trouble by trading “risky” mortgage-backed securities (MBS).
No. Insured banks got into trouble in the financial crisis by buying and holding MBS backed by subprime and other low-quality mortgages, not from trading these instruments. When these loans declined in value in 2007, they caused significant losses to the banks that had invested in them. This is the same thing as saying that banks got into trouble by making bad loans, but it has nothing to do with Glass-Steagall or its supposed repeal....
Myth 4: The repeal of Glass-Steagall allowed bank holding companies and bank-affiliated investment banks to use insured funds for risky trading.
Very unlikely. The 1999 change in Glass-Steagall allowed insured banks to be affiliated with investment banks, which could indeed take substantial risks in underwriting, dealing, and trading securities of all types. Investment banks—even those affiliated with insured banks—have no access to insured deposits. Moreover, banking regulations make it extremely difficult for insured banks to lend funds to, guarantee, or otherwise assume or support the risk-taking of their affiliates....
Myth 5: By allowing insured banks to affiliate with risk-taking investment banks, the 1999 change in Glass-Steagall caused losses to the banks that contributed to the financial crisis.
No. As noted above, insured banks suffered losses in the financial crisis by making bad loans—that is, buying and holding MBS based on subprime and other low-quality mortgages.....
I probably cut out too much but you can read all # Five Myths about Glass-Steagall (http://www.american.com/archive/2012/august/five-myths-about-glass-steagall).
Or read @ Let’s shatter the myth on Glass-Steagall (http://www.washingtonpost.com/lets-shatter-the-myth-on-glass-steagall/2012/07/27/gJQASaOAGX_story.html):
...“So after the Great Depression, Congress wanted to put a firewall between the [banks and the] investment banks. They wanted to make sure that Wall Street could melt to the ground and the commercial banks wouldn’t be touched. They passed a law, the Glass-Steagall Act. Now you could be Gordon Gekko [tycoon in the movie “Wall Street] or George Bailey [small-town banker in the movie classic, “It’s a Wonderful Life”], but you couldn’t be both.”
Then, explains the brainy-but-beautiful correspondent, Ronald Reagan launched a two-decade push toward deregulation, which culminates in the repeal of Glass-Steagall in 1999. Suddenly, Gordon Gekko could make risky bets with George Bailey’s deposits, and the rest, as they say, is history.
It was vintage Sorkin: eloquent, fast-paced dialogue that perfectly channels the liberal political/cultural zeitgeist, transforming what appears to be a complex story into a simple morality play.
The only thing is, it’s not true — not even close. Yet it has been repeated so many times — on PBS and NPR, in the liberal blogosphere, on very-serious Op-Ed pages, in an Oscar-winning documentary....