From Washington Post’s Steve Pearlstein. (hat tip Bob Wenzel)
Repeal of Glass-Steagall has become for the Democratic left what Fannie Mae and Freddie Mac are for the Republican right — a simple and facially plausible conspiracy theory about the crisis that reinforces what they already believed about financial markets and economic policy.
But why let facts get in the way of a good screenplay?
Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.
The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.
Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.
Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.
Did U.S. investment banks create a shadow banking system and derivatives market outside the normal regulatory framework that encouraged sloppy lending and created what turned out to be toxic securities? You betcha.
And did regular banks make some of those bad loans and buy up some of those toxic securities? Yes, they did.
But that was as much a problem at the banks and investment banks that combined as those that remained independent. More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.
Confronted with these inconvenient facts, the conspiracists like to double-down and argue that the real damage caused by repeal of Glass-Steagall is that it triggered a wave of bank consolidation — which has now left more than half of the country’s banking assets under the control of a handful of institutions that are so big that the government has no choice but to bail them out if they risk a meltdown of the financial system.
No doubt about it — too-big-to-fail is a problem. It turns out, however, that it was also a problem in 1984, when Continental Illinois, the seventh-largest U.S. bank with a whopping $40 billion in assets, had to be rescued. It was a problem a few years later when the Fed quietly rescued Citicorp because of mountains of loans to Latin American governments that turned sour. It was a problem in 1998 when the Fed had to orchestrate the rescue of Long-Term Capital Management, a hedge fund with less than $5 billion in capital. And it was the reason behind the Fed’s 2007 rescue of Bear Stearns, with less than a quarter the size of its biggest Wall Street rivals.
Read the rest here
For the left, evidences that goes against them have simply been ignored.
The creed of the infallible moral authority of governments implies that all so-called “market failures” intuitively stem from the lack of government controls or oversight, the repeal of the Glass-Steagall act, notwithstanding.
Canada didn’t have a Glass-Steagall yet avoided the crisis of 2008 (Tom Woods). This only goes to show that, not only from the evidence perspective, their logic has been inconsistent or does not add up.
Reducing government, for the neo-liberals, essentially takes away the path to political nirvana. It would be senseless to argue against faith based political zealotry.
