repeal of Glass Steagall into law?…setting in place the foundation for the biggest bubble/collapse since the Great depression?
Really?
Trump Wants To Bring Back Glass Steagall? Bad Idea
Donald Trump, speaking about his plan to bring back a "21st century" version of the Glass-Steagall banking act, in Charlotte, N.C. (AP)
10/27/2016
Speaking on Wednesday in Charlotte, N.C., Donald Trump revived an idea that he had some time ago: Creating a new Glass-Steagall Act for the 21st century as one way to help African-Americans gain access to credit. It's hard to imagine a worse idea for reviving the banking industry and the economy — or for helping African Americans.
To be sure, in his speech Trump said a number of things that are absolutely true.
"Dodd-Frank has been a disaster, making it harder for small businesses to get the credit they need," Trump said.
Dead on. He also said this:
"The policies of the Clintons brought us the financial recession — through lifting Glass-Steagall, pushing subprime lending, and blocking reforms to Fannie and Freddie. It's time for a 21st century Glass-Steagall and, as part of that, a priority on helping African-American businesses get the credit they need."
Again, all correct — except for the parts that say "Glass-Steagall."
For those who don't know, Glass-Steagall was first signed into law in 1933, in the depths of the Great Depression. The idea was that banks were in a weakened state, and they shouldn't be gambling with depositors' funds in the stock market. So, by law, the two functions were separated. A bank could do one, but not the other.
In 1999, President Clinton, with help from the Republican-controlled Congress, repealed one part of the Glass-Steagall Act: For the first time since the 1930s, the law would allow a bank holding company to own both a commercial bank and an investment bank at the same time, but it still did not permit them to commingle their funds. Commercial banks were still forbidden from underwriting or dealing securities. They still are.
This latter point is absolutely key, since it's routinely misreported in the media that Clinton "repealed" Glass-Steagall. He did no such thing. It still exists on the books, but in slightly changed form. And Glass-Steagall played no role whatsoever in the financial market meltdown — that's a progressive-left fantasy.
Even so, from 2008 on, it became a Democratic Party talking point that Glass-Steagall repeal — or, what some called "deregulation" — was the reason for the housing market collapse and subsequent financial market meltdown. And it aided in the 2010 passage of the spectacularly awful Dodd-Frank financial reforms, which many economists now believe are largely to blame for our substandard economic and jobs growth over the past eight years.
The myth continued to be fed during the 2015-2016 presidential campaign, with both Elizabeth Warren and Bernie Sanders pushing the idea that Glass-Steagall repeal was a major reason for the financial collapse. This is just plain financial illiteracy.
Why would they say something so obviously wrong? The Glass-Steagall narrative served the Democrats' purposes to suggest that something the Republicans had a hand in — financial deregulation and Glass-Steagall's partial reform — was the real cause of the financial crisis. Sorry, but to use an old economics term, that's bull.
Peter Wallison understands perhaps better than any living person what happened before the 2008 financial crisis. Now a fellow with the American Enterprise Institute, Wallison was a member of the government's official commission that investigated the financial crisis, and has spent countless hours researching the topic. His book about the crisis, " Hidden in Plain Sight," is required reading for anyone who wants to know what really happened.
What does he say? "There is no evidence that any bank or bank holding company (that is, a firm that owns a bank) got into trouble because of an affiliation with a securities firm," Wallison wrote. "The losses that banks and bank holding companies suffered in the financial crisis were the result of what had always been standard banking activity."
Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers got in trouble because they had been prodded by the federal government — starting with President Clinton — to both underwrite and purchase mortgage-backed securities to fund more mortgage lending than was prudent. With Fannie Mae and Freddie Mac as their market enforcers, the federal government stepped in and forced commercial mortgage lenders to finance subprime loans to poor and minority households, often with bad credit histories.
Why did they do something that could come back to hurt them? Banks that refused to play along feared that politicized regulators might deny their request to merge with another bank — or to expand their branch network.
Fearing an inflation surge, the Fed kept raising rates all the way through 2006. As home prices plunged, the value of the collateral backing hundreds of billions in loans made to bad credit risks collapsed. That left investment banks, commercial banks, and mortgage companies with massive losses on loans and mortgage-backed securities.
Too much regulation and too many bureaucrats making bad decisions for banks — based on political factors instead of market conditions. That, not some mythical "repeal" of Glass-Steagall, is how the financial crisis happened. Indeed, it could be argued that the 1999 Glass-Steagall reform, by helping to diversify bank holding companies' assets, might have kept the crisis from being worse than it was.
It would be nice to think that this is a political salvo by Donald Trump against the far left, an attempt to steal some of Hillary's thunder just a week and a half before the election. If not, it would be a very bad idea indeed to bring back Glass-Steagall as it was.
RELATED:
Sorry, Hillary, You And Bill — Not Tax Cuts — Caused The Financial Crisis
Happy Birthday Dodd-Frank Law — Now Please Kill It
Dodd-Frank Could Make A Financial Crisis More Likely
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