Whatever merits separating banking from other economic activity might have, it would not have prevented or lessened the 2008 financial crisis. What sparked the meltdown was imprudent mortgage loans. Would banks have refused to make those loans if they had been forbidden to trade for their own accounts? We know the answer, because lots of bad loans originated with small banks, untainted by any significant nonbanking business, that then sold them to larger institutions.
Would a new Glass-Steagall Act have kept purchasers of bad loans away? Of course not. Mortgage-back securities offered what looked like high yields at little risk. The buyers would merely have been different.
When the housing market crashed and defaults soared, would a Glass-Steagall world have escaped a credit crisis? No, because nonbanks, which would have held all of the toxic assets, are major sources of credit. Their collapse would have been calamitous. Long-Term Capital Management wasn’t a bank, yet its bankruptcy in 1998 led to a “too big to fail” bailout. Massive losses by nonbanks in 2008 would have led to the same decisions as losses by bank-nonbank hybrids. Only the identities of the rescued parties would have differed.
The President’s announcement of Glass-Steagall 2.0 offered no rationale. His point, as he makes more than clear in the last few paragraphs, in which he denounces “soaring profits”, “obscene bonuses”, high credit card fees and pass-throughs of taxes to consumers, is to pick a fight with “industry lobbyists from Wall Street”.
Explaining yesterday why the last day of his first year in office was marked by a Republican victory in Massachusetts, the President offered a pair of mock-worthy thoughts that help us understand what he said today. First,
If there’s one thing that I regret this year is that we were so busy just getting stuff done and dealing with the immediate crises that were in front of us that I think we lost some of that sense of speaking directly to the American people about what their core values are and why we have to make sure those institutions are matching up with those values.
Yeah, The One was virtually incommunicado, limiting himself to 158 interviews and 411 “speeches, comments and remarks”. That’s not even two a day! Now he’s going to shout louder and more often.
Second, voters elected Scott Brown, because they’re still mad at George W. Bush:
Here’s my assessment of not just the vote in Massachusetts, but the mood around the country: The same thing that swept Scott Brown into office swept me into office. People are angry and they are frustrated. Not just because of what’s happened in the last year or two years, but what’s happened over the last eight years.
Therefore, let the last Presidential campaign continue! Today’s bit of demagogy isn’t the last we’ll hear. No one doubts that the 2008 meltdown exposed risks in the world’s financial system. Analyzing them dispassionately and fashioning protective measures ought to be a high priority. The President, though, will be busy frying fat cats.
Addendum: Nicole Gelinas:
Obama needs to explain how, exactly, such a prohibition would have prevented or alleviated the financial crisis in any significant way. Consider:
* Bear Stearns did not rely on FDIC-insured deposits. Yet the government had to bail it out in March 2008 (indirectly).
* AIG did not rely on FDIC-insured deposits. Yet the government had to bail it out in September 2008 (directly, and often).
* Lehman Brothers did not rely on FDIC-insured deposits. Yet the government's failure to bail it out in September 2008 set off a mass-scale panic.
* Non-bank money-market funds (by definition!) do not rely on FDIC-insured deposits. Yet the government had to guarantee them against losses in September 2008 to avert a run.
Obama’s proposal would be brilliant — save for the needling inconvenience that it has nothing to do with reality.
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