Friday, April 20, 2012

The inmates are revolting

At J Bradford DeLong's blog there's no sympathy for the devil who challenges the sacred Glass-Steagall myth;
Well, if you're determined to be stupid and ignore economic history, the rest of us should assume there's no point trying to help you.
....if you don't believe Comparative Advantage exists, why would you teach economics?
That's no way to treat a scholar, but he has defenders (if he allows it);

Unaccustomed as I am to defending Prof. DeLong, he's clearly in the stronger position here.
First, Glass-Steagall has not been repealed--next time you're in a bank see if there isn't sign stating that its deposits are insured by the FDIC (created by...Glass-Steagall).  
Second, Gramm, Leach, Bliley (1999) only repealed two sections (of 34) of the 1933 act.  Those two (#20 and #32) had prohibited 'affiliations' between commercial and investment banks.  The provisions that keep commercial banks using their insured deposits from underwriting securities and investment banks from taking checking deposits are very much still law.
Third, one would need some connection between the repeal of G-S sections 20 and 32, and mortgage backed securities to even begin to blame it for the financial crisis that everyone agrees stems from the bursting of the housing bubble.  
There is no such connection.  Banks have been holding MBS since they were invented in the 1970s.  Nothing in GLB had anything to do with that.
Finally, there was one thing in GLB that might have had an effect had it not been ignored by The Fed.  That was a provision calling for them to study the idea of forcing banks to hold some of their capital in subordinated debentures that couldn't be guaranteed by any govt. agency (or anyone else).  That would have made them the 'canary in a coal mine' if they dropped in value indicating trouble in the offing.

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