Glass Steagall

Everyone seems to want to reimpose Glass Steagall and I still can\’t understand why. The latest justification is this:

I also think US regulators should re-impose the Glass-Steagall Act which was passed in 1933 in the wake of the Wall Street Crash and the ensuing Great Depression where so much damage was done by banks originating weird and wonderful loans, and selling them onto unsuspecting investors who lost their shirts. Sounds familiar?

Glass-Steagall kept commercial banking (the taking of deposits and making loans) separate from investment banking (issuing and underwriting securities, trading and M&A advice). Re-imposing Glass-Steagall would force investment banks to go back to their roots and accept that their main functions should be advising clients and dealing for them as agents that requires little if any capital, and commercial banks would go back to making loans and holding them until they are repaid.

As soon as you separate loan origination from the repayment risk you have a problem. When I was growing up, the bank manager lent you money and then he and you sweated during the period it took you to repay it. He didn\’t package it up in a structured vehicle and sell it to someone in an insurance company.

Now that specific concern over securitisation I understand (even if I think it overblown). But why would reimposing Glass Steagall do anything?

Securitisation (just read Liar\’s Poker for evidence) predated the effective repeal of GS (let alone the legal). In many ways securitisation was in fact a reaction to GS, a way in which the system tried to find a way around it.

So why would the reimposition help?

1 thought on “Glass Steagall”

  1. As far as I know the argument then, and now, for Glass-Steagall type regulation was that the government would guarantee retail deposits, and therefore they shouldn’t be used for riskier investment banking transactions. It’s not inherently absurd as it’s about the limit of government.

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