The Glass-Steagall Act of 1933 separated the investment and the deposit banking businesses. A bipartisan majority repealed it and President Clinton signed it into law in 1999.
Is the repeal an example of deregulation leading to catastrophe? According to “A Mortgage Fable” in today’s Wall Street Journal,
Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania.
The editorial lists several contributing factors besides the “original sin of this crisis” — easy money — and “mark-to-market” accounting.
- Fannie Mae and Freddie Mac (“They channeled far more liquidity into the market than would have been the case otherwise, especially from the Chinese, who thought (rightly) that they were investing in mortgage securities that were as safe as Treasurys but with a higher yield.”)
- A credit-rating oligopoly (“Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets.”)
- Banking regulators (“[B]anks that made some of the worst mortgage investments are the most highly regulated …. Meanwhile, the least regulated firms — hedge funds and private-equity companies — have had the fewest problems, or have folded up their mistakes with the least amount of trauma.”)
- The Community Reinvestment Act (“This 1977 law compels banks to make loans to poor borrowers who often cannot repay them.”)
Numerous circumstances separate and apart from the 1999 repeal of Glass-Steagall conspired to cause this mess.
As President Clinton made clear in 1999, repealing Glass-Steagall made sense and could hardly have caused the current crisis:
Beginning with the introduction of an Administration-sponsored bill in 1997, my Administration has worked vigorously to produce financial services legislation that would not only spur greater competition, but also protect the rights of consumers and guarantee that expanded financial services firms would meet the needs of America’s underserved communities. Passage of this legislation by an overwhelming, bipartisan majority of the Congress suggests that we have met that goal.* * * *Although the Act grants financial services firms greater latitude to innovate, it also contains important safety and soundness protections. While the Act allows common ownership of banking, securities, and insurance firms, it still requires those activities to be conducted separately within an organization, subject to functional regulation and funding limitations.