Why blame Gramm Leach Bliley?

[gonzomax]

@Cisco

Probably correct, to some extent, but doesn’t absolve the banks for loosening credit standards. I saw this mess coming back in 2005 and would’ve seen it a lot earlier had I been more experienced. In retrospect, we were making preposterous loans at least as far back as spring 2003. I find it unfathomable that people at the top of these corporations didn’t see this coming at least a year or two before I did.

Many did and have money in international currencies and are in banks around the world. They tried to foolproof themselves as they looted the system and took a chance on crashing it.

[LonghornDave]

@elucidator

A quibble, home boy. A minor thing, but that’s the trouble with quibbles…

Investment banks and commercial banks play by different sets of rules, and have to meet different standards of burdensome interference. I belileve that the last two dinosaurs of investment banking have decided that they would rather be plain ol’ unglamourous commercial banks after all.

Put baldly and no doubt oversimplified, investment banks can play a bit faster and looser, as they are private dancers, the rules for collateral are different, and their access to credit from the Fed is different and, of course, they are not eligible for salvation from the Feds, not being actual “banks”, but investment entities.

Until now.

The single act of Glass Steagall may not be so important in itself as it signals and codifies a philisophy fervently shared by Gramm and others, the faith in the Holy Free Market, the transcendent belief that a market free from government intervention will soar on wings, to the benefit of all.

But this is a faith, no? There has never been any such creature as the “Free Market”, money is power, power is money. Those who have one have the other, and those who have those things invariably strive to keep what they have and get some of yours. Control of government is clearly the best insurance, and this obvious truth has held sway since long before the Medici.

The “Free Market” economic religion is claptrap, hogwash, balderdash, sir! It is to ecoonomics as Objectivism is to ethics, a nullity dressed up as a philosophy.

I don’t want to put words in your mouth, but you seem to be saying that the repeal of Glass Steagall is bad simply because it is deregulation for the purpose of trying to attain an impracticable free market. Isn’t it possible that Glass Steagall was a worthless regulation and that the loss of it really hasn’t had any effect on the housing / credit crises?

It seems to me that new, pertinent regulation could have helped prevent this crises and that this specific deregulatory move did not have much effect at all.

[elucidator]

All by itself, no. But it represents a landmark in the ongoing effort to reverse the dreadful socialism set in motion by FDR, to return to days of brisk commerce and unfettered entrepreneurship. Deregulation is one of the icons of the reactionary movemenet. They assert fervently and repeatedly that government regulation stifles business and growth. That we experience growth relentlessly they attribute to their own wisdom in holding back the dread rot of regulation. Pretty nifty, gotta admit.

But no experiment is possible, really, in economics, there is only interpetation of events through different viewpoints. There are no doubt some points to be made for free market thinking, but the devotion of the Goober Nordquists of the world is wildly out of proportion.

I place the bulk of the blame on the Bushivik regime. This thing has been bearing down on us like a glacier, for years I’ve been reading Cassandrist warnings, and no one did a thing. Had it not been for George’s Excellent Adventure compounded by the tax cuts, perhaps they would have cooled the credit market a notch, demanded more scrutiny of the fantasy housing market. But empty equity was shoring up credit, which was shoring up consumption, well, you know the drill.

And, of course, a lot of Republicans were making a lot of money. Men who could be counted upon to perform their civic duty, check-writing wise. Prudent, responsible men. Yes.

[Jas09]

@LonghornDave

If the problem is that the same people that are originating loans are the ones purchasing them, then why aren’t we seeing failures from the entities that perform both functions. It seems that the majority of failures are purely investment banks (Merrill Lynch, Bear Stearns, Lehman Brothers), savings & loans which were required to hold a large percentage of mortgages per their charter (Indymac), government sponsored entities formed for the purpose of buying mortgages (FNMA and FHLMC). If GLBA was a primary contributor, then wouldn’t we be seeing the bailout of commercial banks that had investment banking arms such as BofA and JPM? We’re seeing just the opposite as it is the commercial banks that are able to bailout the investment banks (JPM with Bear Stearns and BofA with Merrill Lynch) because they’re allowed to do so without the constraints of Glass Steagall getting in the way.

This is a very good point and one that I don’t have a good answer for. My only hypothesis is that commercial/investment hybrids (like BofA) have a much broader source of capital and thus a lower percentage of “toxic” paper. However, there were/are rumblings that without the proposed bailout whereby the government purchases toxic paper from anyone wanting to sell it the problems would reach into the commercial banks in a way that wouldn’t have happened if they were not also investment banks. I.e., if we keep our traditional commercial banks nice and boring it is less likely that risky speculation will cause widespread banking collapse. But when we allow the traditional conservative banker to also sideline as a high-risk investment banker it is much more likely that the whole thing will come crashing down.

Also one can invision a situation in which a commercial bank could generate some loans, package them up, and then have their investment banking brethren buy them as a security. Do this for a while, publish your gaudy returns (as the housing bubble grows thanks to the interest rate pressures you mentioned) and suddenly everybody wants in on the act. Throw in a side of dodgy debt ratings from Moody’s et. al. and things get dicey pretty quickly, especially when the bubble bursts.

Nobody (well, at least not me) is saying GLBA is the only or even the primary cause of the crisis, but there are certainly reasons to think it was a contributing factor.

[CJJ]

@LonghornDave

You make it sound like prior to GLBA, banks did not make loans for the purpose of resale. If this is so, why was FNMA created? Glass Steagall was passed in 1933. FNMA was created in 1938. Almost the entire purpose of FNMA was to purchase home mortgage loans in the secondary market. The practice certainly didn’t start with GLBA.

I certainly didn’t mean that GLBA started the practice, but you have to agree that FNMA provided more of a guarantee on mortgages than a real market for trading MBS (they had a monopoly in the “market” for years). Yes, Fannie Mae as a guarantor would provide some incentive to making riskier mortgages, but considering the regulatory hurdles it’s hard to see this being much of an incentive prior to GLBA.

I really don’t know why FNMA was created in the first place; my guess is that “too few” mortgages were being issued during the Depression, and this was a way to inject some cash into the financial system and free up some credit. Again, the fact that FNMA held a government-sponsored monopoly on the secondary market makes it difficult to believe there was much incentive for speculative risk.

GLBA does not deserve the full blame for the current mess, just as slavery doesn’t deserve the full blame for the US Civil War or the assasination of Archduke Ferdinand for WWI. It is a convenient symbol for the general pro-Wall St./anti-regulatory economic philosophy that has dominated Washington politics for the past 30 years. Both Dems and Reps deserve shares of the blame–although it’s clear which has been more in favor of financial deregulation. Odd how they run away from it now when the chickens come home to roost (and no, that wasn’t intended as a Sarah Palin reference).

[CJJ]

@LonghornDave

If you want to lay the blame on lack of regulation, then fine. It doesn’t appear to me that it was lack of regulation through deregulation though. It seems like it was lack of regulation through regulation never being there in the first place. Did GLBA have anything to do with lack of regulation of hedge funds or minimal regulation of investment banks?

I’ll agree with this. Poor regulation of investment banks and hedge funds were the loaded gun in this disaster, and can’t be overlooked. And when I read things like this Floyd Norris piece from last December, I have to wonder how anyone calculated the value of securities in the private secondary mortgage market (emphasis mine):

The Fed will lend money to banks based on almost any asset they own, even ones that are not liquid at all. That will include some of the more exotic loans and securities out there…

How much will the Fed lend against illiquid assets? It has a public list, already in use in discount window lending. You will note that it allows the lending of up to 85 percent of the face value of AAA-rated collateralized mortgage obligations, if there is no observable market value. There are some C.M.O.’s out there that have not yet been downgraded but that might not bring that much in a sale.

I’d love to see which assets are pledged, and how much the Fed lends against them. But the Fed won’t disclose those facts. Nor will it let us know which banks borrow using the new facility.

[Ludovic]

I know big financial cities are more socially liberal, but why blame Gay Lesbian Bisexual Associations for this crisis?