Is Glass-Steagall Mostly A Red Herring? Does It Matter?
Mathew Yglesias argues that "Glass-Steagall is mostly a red herring":
Glass-Steagall Is Mostly A Red Herring, by Mathew Yglesias: Something I've heard from participants in the 99 Percent Movement is a revival of interest in rescinding the repeal of the 1932 Glass-Steagall Act. I think this is largely a misunderstanding...
First off, what did Glass-Steagall do? Well it did a number of things (like establish the FDIC) that were never repealed. But the rule that was repealed in the 1999 Grammâ€"Leachâ€"Bliley Act were restrictions on the same holding company owning a bank and owning other kinds of financial companies. The thing about this is just that there's really nothing in particular about co-ownership that you can point to as having been a problem in the financial crisis. And if anything that fact seems to indicate that the repealers were right to think there's no special problem here -- even in a huge financial crisis combined financial firms worked no worse than other kinds. ...I am sympathetic to this point of view, i.e. that the elimination of Glass-Steagall wasn't an important causative factor in the crash. However, as I said here a few days ago:
There is a debate over the extent to which removing Glass-Steagall -- the old version of the Volcker rule -- contributed to the crisis. However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it's clear that it has for the reasons outlined above.So there's still a reason to reinstate some version of the rule even if it wasn't the main problem in the banking sector this time around.
