by BARRY RITHOLTZ, The Big Picture
The repeal of Glass Steagall itself did not cause the financial crisis. However, the repeal did help make the crisis worse.
I bring this up because there has been a series of straw man articles claiming Glass Steagall was not a cause in the crisis. This misstates the impact and the broader context. The overturning of the successful 1933 legislation was part and parcel of an ideology that WAS a major factor in the crash: The erroneous belief system that banks can self-regulate. This manifested in a variety of bad ideas, poor oversight and worse legislation.
The finacialization of the American economy allowed banks to become bigger, more complex, and greatly leveraged. When it all came down, the crisis was broader, deeper and more dangerous than it would have been otherwise.
Glass Steagall’s repeal, after 25 years and $300 million worth of lobbying efforts, culminated decades of radical deregulation.
New-fangled derivatives? No oversight, reporting, or reserves necessary, courtesy of the Commodities Futures Modernization Act of 2000 (CFMA). You can thank Enron Board Member Wendy Gramm, and her Senator husband Phil Gramm, for that one. Subprime-Lend-to-sell-to-securitizers business model? Those are the financial innovators! At least, that is what Alan Greenspan called them, and why he refused to oversee them as Fed chair. Rules on SEC leverage? Let’s create a special exemption from the law for just 5 investment banks.
And so on. The list of radical deregulation and false beliefs is long and painful and dangerous and costly. [MORE]