[Bill,
September 17, 2008]
Glass-Steagall Repeal
UPDATE: I'm getting a lot of hits for this entry. I think I spoke far too quickly and without sufficient knowledge here. I have no confidence that I've added anything worthwhile to the debate here. I'm striking through it and will continue looking into the issue. The only thing I feel very confident in stating is that Sarbanes-Oxley is hurting the economy. The rest -- I dunno.
Well, that took about 10 years, right? Glass-Steagall was stupidly repealed by a broad, bipartisan vote (90-8 in the Senate, Biden for it, McCain didn't vote) about 10 years ago and signed by President Bill Clinton. It was one of many reasons I left the Democratic Party (hey, if the Democrats aren't committed to reining in Wall Street a la the New Deal, WTF good are they?)
And here it is 10 years later, and we have a financial meltdown. The Fed just borrowed a couple two tree 45 billion from the Treasury today. What the hell, bail out Wall Street, prop up the system, and then just print the money if you run out.
Crap. Both parties hands are all over this — but in fairness to the Democrats, this is more of a Republican idea that the Democrats went along with. Bush II had plenty of time to set things right.
Among the causes of our financial crisis:
1. Repeal of Glass-Steagall.
2. FASB changes that I'd rather not get into.
3. Alan Greenspan (appointed by a Republican, reappointed by a Democrat) allowed all sorts of complex financial products.
4. Banks' leveraging stock purchases.
The whole thing is FUBAR. Here's a clue: Return to some of the sound financial regulations that worked, I dunno, from 1933 to 1998. Assholes. This is the same kind of shit that led to the Great Depression.
Robert Samuelson has a good explanation here.
Note: I don't know how bad it'll get. I don't know if we have a $500 billion S&L scandal on our hands or something far worse — I do know that there are deep structural problems and a need for financial re-regulation. And not stupid shit like Sarbanes-Oxley.
And here it is 10 years later, and we have a financial meltdown. The Fed just borrowed a couple two tree 45 billion from the Treasury today. What the hell, bail out Wall Street, prop up the system, and then just print the money if you run out.
Crap. Both parties hands are all over this — but in fairness to the Democrats, this is more of a Republican idea that the Democrats went along with. Bush II had plenty of time to set things right.
Among the causes of our financial crisis:
1. Repeal of Glass-Steagall.
2. FASB changes that I'd rather not get into.
3. Alan Greenspan (appointed by a Republican, reappointed by a Democrat) allowed all sorts of complex financial products.
4. Banks' leveraging stock purchases.
The whole thing is FUBAR. Here's a clue: Return to some of the sound financial regulations that worked, I dunno, from 1933 to 1998. Assholes. This is the same kind of shit that led to the Great Depression.
Robert Samuelson has a good explanation here.
Note: I don't know how bad it'll get. I don't know if we have a $500 billion S&L scandal on our hands or something far worse — I do know that there are deep structural problems and a need for financial re-regulation. And not stupid shit like Sarbanes-Oxley.
Let me give you a new list:
1) extremely loose monetary policy
2) Democrats' "affordable" housing push, irrespective of borrowers' credit risk
3) Failure to reign in Fannie and Freddie, which Dems voted against in party-line vote in 2005.
4) Poor risk management among Wall Street banks.
5) China's admittance to the WTO
6) Reckless borrowing by American consumers
Get a clue, dude.
WSJ REVIEW &OUTLOOK
OCTOBER 1, 2008
Bill v. Barack on Banks
Clinton instructs Obama on finance and Phil Gramm.
A running cliché of the political left and the press corps these days is that our current financial problems all flow from Congress's 1999 decision to repeal the Glass-Steagall Act of 1933 that separated commercial and investment banking. Barack Obama has been selling this line every day. Bill Clinton signed that "deregulation" bill into law, and he knows better.
In BusinessWeek.com, Maria Bartiromo reports that she asked the former President last week whether he regretted signing that legislation. Mr. Clinton's reply: "No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter.
"But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."
One of the writers of that legislation was then-Senator Phil Gramm, who is now advising John McCain, and who Mr. Obama described last week as "the architect in the United States Senate of the deregulatory steps that helped cause this mess." Ms. Bartiromo asked Mr. Clinton if he felt Mr. Gramm had sold him "a bill of goods"?
Mr. Clinton: "Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence.
"But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment."
We agree that Mr. Clinton isn't wrong about everything. The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle -- oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement.
As for the sins of "deregulation" more broadly, this is a political fairy tale. The least regulated of our financial institutions -- hedge funds -- have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren't diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.
Meanwhile, commercial banks that had heavier capital requirements were struggling to compete with the Wall Street giants throughout the 1990s. Some of the deposit-taking banks that were allowed to diversify after 1999, such as J.P. Morgan and Bank of America, are now in a stronger position to withstand the current turmoil. They have been able to help stabilize the financial system through acquisitions of Bear Stearns, Washington Mutual, Merrill Lynch and Countrywide Financial.
Mr. Obama's "deregulation" trope may be good politics, but it's bad history and is dangerous if he really believes it. The U.S. is going to need a stable, innovative financial system after this panic ends, and we won't get that if Mr. Obama and his media chorus think the answer is to return to Depression-era rules amid global financial competition. Perhaps the Senator should ask the former President for a briefing.
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This post is really a lesson for me in sort of knee-jerk posting and calling folks names. I'm not saying I'm wrong, or right, in this post. Having read more about Glass-Steagall, I'm now confused about the issue more than anything.