I’ve got a new piece up on TIME.com. It was originally intended as my column for the magazine, but got bumped by the dastardly space-constrained editors. Here’s how it begins:
It has become an article of faith for many on the left — and some from other political precincts — that the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial banks from Wall Street, is directly responsible for our current dire financial plight. Its repeal, argued journalist Robert Kuttner in testimony before Congress last year, enabled “super-banks … to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s.”
Kuttner may be right about the conflicts, but it’s awfully hard to see how they brought on the current mess. In fact, Bank of America’s takeover of Merrill Lynch and JP Morgan Chase’s of Bear Stearns underscored a truth that was already becoming apparent on Wall Street — super-banks (more commonly known as universal banks) are, for all their flaws, a lot more stable and secure than un-super investment banks.
“If you didn’t have commercial banks ready to step in, you’d have a vastly bigger crisis today,” says Jim Leach, a Republican former Congressman from Iowa (and current Barack Obama supporter) whose name is on the Gramm-Leach-Bliley Act that repealed Glass-Steagall. Leach is no neutral observer, and there can be no proving that Glass-Steagall repeal has made the world safer. But amid the predictable debate now underway about how much new financial regulation is needed, it just doesn’t make a very convincing scapegoat for the crisis. Read more.
This grew out of a blog post I wrote on Monday. And my thinking is continuing to evolve. Starting with my concluding sentence:
But what really matters most is that any new regulatory system dispense with the perverse practice of exempting new products and institutions from the rules that apply to the tried and the true.
This was something I tacked on at the very last minute, and didn’t build up to very well. But I’m starting to think it’s the essential point. The New Deal regulatory structure basically assumed that there would never be any financial innovation. Each financial entity had its assigned task (“S&Ls, you make 30-year fixed-rate mortgage loans”) and that was it. This didn’t hold up very well when financial conditions changed dramatically in the 1970s. But what replaced it was a system where, mostly inadvertently, financial innovations came to be subjected to less regulation than tried-and-true financial practices and products. Which was completely backwards.
I’ve estimated before (based on no data whatsoever) that:
95% (or maybe it’s 99%, or 93.732%) of “financial innovation” amounts to either:
1) Putting old wine in new, more expensive bottles, or
2) Finding some new way to hide or ignore risk.
A few financial innovations are useful. We don’t want to thwart them entirely. But they should be subjected to more–not less–oversight than stocks and bonds.