A recent post by blog member Aac uncovered a gem from the deep past–1999, when to the believers in “efficient markets”, deregulation–in this case the repeal of the Depression-inspired Glass-Steagall Act that prevented commercial banks from operating as merchant banks and vice-versa–seemed like such a wonderful idea.
I don’t see this crisis as a conspiracy, but as a manifestation of the endemic tendency in the financial system to instability. However, this also involves legislatures being persuaded to remove whatever past bounds limit the degree of financial recklessness, as the dominance of the finance sector grows. The repeal of Glass-Steagall was the last and arguably most important “reform” of Depression-era regulation that enabled this crisis to reach epochal levels.
I’ll add to this page as people locate more such pieces on the Web.
Friday, November 5, 1999: CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS, New York Times.
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another’s businesses.
The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.
“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.”
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression…
“The world changes, and we have to change with it,” said Senator Phil Gramm of Texas, who wrote the law that will bear his name…
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly…
“I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had “seemed determined to unlearn the lessons from our past mistakes.”
“Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,” Mr. Wellstone said. ”Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.”
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
“The concerns that we will have a meltdown like 1929 are dramatically overblown,” said Senator Bob Kerrey, Democrat of Nebraska…
NOTE: Here’s a nice observation, apropos the claims today that the crisis was caused by the government promoting lending to disadvantaged groups:
But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was “mean-spirited in the way it had tried to undermine the Community Reinvestment Act.” And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates…
One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.
Thursday, October 27, 2005; Page D01, Washington Post: Bernanke: There’s No Housing Bubble to Go Bust; Fed Nominee Has Said ‘Cooling’ Won’t Hurt.
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households…
Bernanke believes “the Fed’s job is to protect the economy, not to protect individual asset prices,” said William Dudley, chief economist for Goldman Sachs U.S. Economics Research…
A former chairman of Princeton University’s economics department, Bernanke earned academic renown for his research on the Fed’s role in causing the Depression.
After the 1929 crash, the Fed mistakenly raised interest rates to protect the value of the dollar, which was then pegged to the price of gold, Bernanke wrote in an October 2000 article in Foreign Policy. The higher rates contributed to surging unemployment and severe price deflation. The Fed then made things worse by not acting to counter the credit crunch that resulted from the collapse of the banking system in the early 1930s.
“Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity,” Bernanke wrote.
In late 2000, looking ahead to the possibility of a sharp fall in then-lofty stock prices, Bernanke concluded, “history proves … that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.”
