Glass-Steagall, the 1933 Depression Era act that erected barriers between commercial banks and investment banks, was one of the tools that earlier generations relied upon to prevent "too big to fail". Its repeal in 1999 by the Gramm-Leach-Blilley Act (GLBA) removed those barriers and deregulated swap derivatives. These two factors contributed to the creation of the out-sized, overly-leveraged & systemically-risky financial enterprises that ultimately were either:
- bailed out via TARP, the Fed and [to a lesser extent] the Recovery Act (a/k/a the stimulus); or,
- merged into even larger, more concentrated institutions that are now even more "too big to fail".
Democraps - in this case, then Pres. Clinton and the then minority House - and the Republicon Congress were both responsible.
Clinton signed it. House Dems intiially supported it by roughly a 2-to- 1, while Senate Dems initially voted 43 - 1 against it.
Republicons both sponsored the legislation (all three primary named sponsors are Reps) and overwhelmingly voted for it in both houses of Congress by a margin of roughly 22-to-1.
The repeal of Glass-Steagall was the long-held desire of a particular business special interest, the financial industry (widely, since at least the early '80s; more narrowly even earlier). Accordingly, it had been a target for conservative, free market, big business-favoring Republicons for virtually as long. Democraps eventually came to compromise on its passage in exchange for enhanced Community Reinvestment Act (CRA) provisions aimed at minority access to credit and some privacy concerns. In hindsight, they bargained to cheaply.
Much more should have been required in compensation for the risk - which was actualized - of financial system meltdown & the ensuing Great Recession + high joblessness.
Besides Thomas Frank's critique headlined above, a number of other commentators have remarked on this:
- Ekelund, Robert; Thornton, Mark (2008-09-04). "More Awful Truths About Republicans". Ludwig von Mises Institute. http://mises.org/story/3098.
The last three critics are dismissed as 'lamestream' media with a liberal bias; that does not mean, however, their criticisms are not valid.
The first is from the Ludwig von Mises Institute, the last bastion of one wing of the Austrian School of economics, a conservative libertarian free market school of thought that is often cited & highly regarded by Tea Baggers and Club for Growth types (i.e., Friends of the Koch Bros.). Including the Maine Tea Party, who wrote the Maine Republican Party platform for the 2010 elections. You should read it sometime; borderline Glenn Beckian in its worldview. Yikes.
Of course, there have been defenders, including the original sponsors and ex-Pres. Clinton:
- Calabria, Mark A. (July/August 2009). "Did Deregulation Cause the Financial Crisis?". Cato Institute. http://www.cato.org/pubs/policy_report/v31n4/cpr31n4.pdf.
- Bartiromo, Maria (2008-09-24). "Bill Clinton on the Banking Crisis, McCain, and Hillary". BusinessWeek
The last five defenders are all identifiably conservative sources. The first, a panel discussion hosted by Suffolk University, is neutral, and includes criticisms, not just excuses.
There are no liberal/progressive defenders.
Clearly, GLBA did not all by itself cause the housing bubble and is only a contributor to the financial crisis.
But, overall, on the question of whether repeal of Glass-Steagall was a mistake, I have to come down on the side of Stiglitz, Krugman et al. The conservative naysayers are not convincing. Maybe in some future post I'll delve into why I am not convinced? For now, I leave it to you to take a look for yourself...