Thread: McCain Glass-Steagall Crash

"In 1999, Gramm successfully undid the Depression-era Glass-Steagall Act, removing the decades-old wall between commercial banking, which was heavily regulated, and investment banking, which was not. The Gramm-Leach-Bliley Act did not extend significant new regulation to investment banking.


A Spork in the Drawer: Phil Graham


"The news late Wednesday that Morgan-Stanley was seeking a merger with Wachovia, which would leave Goldman Sachs the lone major Wall Street investment bank still standing independent, prompts a revisiting of a question posed by Time's Justin Fox on Monday: "Aren't You Sort of Glad Congress Repealed Glass-Steagall?"

The Depression-era legislation separated commercial banking from investment banking, and many leftwing critics of deregulation believe that its repeal, in 1999, set the stage for the disastrous behavior leading to the current Wall Street crisis. Fox disagrees, arguing:


Without Glass-Steagall repeal, Bank of America wouldn't be able to buy Merrill Lynch, the only bit of arguably positive news to come out of this crazy weekend. And more generally, it is looking like investment banks that don't have big consumer banking franchises aren't up to the challenge of surviving modern-day financial crises."

Glass-Steagal and the fall of the modern investment bank - How the World Works - Salon.com


"The vote in the house for the Gramm-Leach-Bliley Act wasn't as close, 362-57 in favor. About 75% of Democrats and 93% of Republicans in The House voted in favor of it. The Senate vote was 90-8 in favor. All but 6 Democrats and 1 Republican voted in favor. One Republican, Senator John McCain didn't vote."


Repeal of Glass-Steagall Act cause of housing boom? : Bergen County Foreclosures Blog and Listings


Was the repeal of the Glass Seagall act a contributor to the Housing bubble of 2005-2008?



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Originally Posted by Gladiator

Was the repeal of the Glass Seagall act a contributor to the Housing bubble of 2005-2008?

In 2004 I wrote in Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics:

"Another reason why Austrians seem naïve is their relentless call for deregulation, which often ignores fundamental inequities. This author writes:

"Decentralization is not the same thing as deregulation. The term 'regulation' is meaningless without reference to the basic framework in which banks operate. A stable system can be governed by the usual laws against criminality that apply to all businesses, while an unstable system requires a vast regulatory bureaucracy and is still plagued with corruption. It is naïve for people who dislike big government to advocate deregulation in the latter case, but it is also wrong to assume that the existence of a central bank is part of the regulations which attempt to prevent corruption. Central banks and regulatory bureaucracies are associated with one another, not because they both oppose an inherent instability in banking, but because the existence of a central bank creates an unstable system that requires constant policing (1999, p. xliii).

"In light of the recent scandals, we should point out that there is no invisible hand that prevents dishonest businessmen from cooking their books. For that we need government regulators. And we needed regulations like the Glass-Steagall Act, which prevented conflicts of interest."

I sure got a ration of sh*t for that at Axiomatic Economics - The Mises Community! Of course, the Mises Institute hates me with a passion. If I observed that the sun rises in the east, they would take that as evidence that "He's clearly not a liberterarian as he makes it clear a number of times that he thinks government intervention is most obviously required and necessary for the welfare of people. These sort of comments make me far more dubious of his work. He clearly lacks an understanding of the free market."

Gosh! I guess that I'm just not the libertarian that I always thought I was!

REFERENCES

Aguilar, Victor. 1999. Axiomatic Theory of Economics. Hauppauge, NY: Nova Science Publishers, Inc.

Originally Posted by Onion Eater

In 2004 I wrote in Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics:

Wow, nobody cares.

I sure got a ration of sh*t for that at Axiomatic Economics - The Mises Community! Of course, the Mises Institute hates me with a passion.

Gosh! I guess that I'm just not the libertarian that I always thought I was!

REFERENCES

Aguilar, Victor. 1999. Axiomatic Theory of Economics. Hauppauge, NY: Nova Science Publishers, Inc.

OMG.... You got a ration of sh*t because you trolled their board. How many accounts did you create on their board, talking smack, and making bets of which you lost, but refused to pay?

Just for everyone to see, here is what Onion Eater, or Aguilar or whatever did to make the people at Mises.org actually hate him...

Axiomatic Economics - The Mises Community

Looks like we have a troll on our hands...

Originally Posted by Goldenboy219

Looks like we have a troll on our hands...

Ode to an Economics Troll

Troll sat alone on his seat of stone,
And critiqued what the Austrians did enthrone;
For Hayek had got his triangle backwards, clear
But a rebuttal was hard to come by.
Done by! Gum by!
In a cave in the hills he dwelt alone,
And a rebuttal was hard to come by.

Up came Bob with his big boots on.
Said he to Troll: “Pray, what is yon?
For it looks like Prices n' Production o' my nuncle Fritz.
As should be a-lyin' in the graveyard.
Caveyard! Paveyard!
This many a year has Fritz been gone,
And I thought his books were lyin' in the graveyard.”

“My lad,” said Troll, “Hayek’s triangle you extol
But what be a theory with a logical hole?
Thy nuncle was dead as a lump o' lead,
Afore I wrote my Critique.
Weak! Shriek!
He can spare a share for a poor old troll,
For he don't need his theory whole.”

Said Bob: “I don't see why the likes o' thee
Without axin' leave should go makin' free
With the books or the larning o' the Austrian's kin;
So hand the old book over!
Rover! Trover!
Though dead he be, it belongs to he;
So hand the old book over!”

“For a couple o' pins,” says Troll, and grins,
“I'll refute thee too, and gnaw thy work’s withins.
A bit o' fresh theory will go down sweet!
I'll try my polemics on thee now.
Hee now! See now!
I'm tired o' gnawing old books and skins;
I've a mind to refute mod' Austrians now.”

But just as he thought his reputation wrought,
He found his hands had hold of naught.
Before he could mind, Bob slipped behind
And gave him the boot to larn him.
Warn him! Darn him!
A bump o' the boot on the seat, Bob thought,
Would be the way to larn him.

But harder than stone is the flesh and bone
Of a troll that sits in the hills alone.
As well set your boot to the axiomatic root,
For the seat of a troll don't feel it.
Peel it! Heal it!
Old Troll laughed, when he heard Bob groan,
And he knew the young Austrian could feel it.

Bob's reputation is game, since home he came,
And his doctorate degree is lasting lame;
But Troll don’t care, and he’s still there
With the rebuttal he boned from its owner.
Doner! Loner!
Troll’s old seat is still the same,
And the rebuttal he boned from its owner!

You see, Bob pushed his analysis to caveman days,
But Troll insisted that value in the future lays.
Value is always subjective, not intrinsic at all,
And supply is not the same as stock, he explained.
Reigned! Deigned!
The Economics Troll won, Hayek’s triangle he did raze,
As Axiomatic Theory prevailed, Austrianism waned.

Axiomatic Economics by Victor Aguilar: Austrian, Chicago and Keynesian Rebuttals to Aguilar

Originally Posted by Gladiator

"In 1999, Gramm successfully undid the Depression-era Glass-Steagall Act, removing the decades-old wall between commercial banking, which was heavily regulated, and investment banking, which was not. The Gramm-Leach-Bliley Act did not extend significant new regulation to investment banking.


..

I've read elsewhere that Alan Greenspan had reinterpreted Glass-Steagall in a way that made it essentially toothless, esp in 1996 when he upped the permissible percentage of banking that brokers could do to 25%.

In any case, the repeal of this act seems to have marked the low point of the Democratic Party, a.k.a. the Republican-Lite Party.

Originally Posted by IBrakeForTrees

I've read elsewhere that Alan Greenspan had reinterpreted Glass-Steagall in a way that made it essentially toothless, esp in 1996 when he upped the permissible percentage of banking that brokers could do to 25%.

Yes, in 1986 it went up to 5%, in 1989 it went up to 10% and in 1996 it went up to 25%, which made the restriction meaningless.

Originally Posted by Gladiator

Justin Fox disagrees, arguing: "Without Glass-Steagall repeal, Bank of America wouldn't be able to buy Merrill Lynch, the only bit of arguably positive news to come out of this crazy weekend."

This is a bit disingenious - if Glass-Steagall had not been repealed, Merrill Lynch would not have been in the business of buying packages of mortgages and wouldn't have had to sell itself to anybody when the housing market fell.

Originally Posted by Onion Eater

The term 'regulation' is meaningless without reference to the basic framework in which banks operate.

The 1933 Glass-Steagall legislation created the FDIC and that did not get repealed in 1999. This is what I was referring to when I spoke of "the basic framework in which banks operate."

The original intent of the law was, basically, an exchange: banks got insurance of their deposits in exchange for surrendering some of their freedoms.

I am a libertarian and, as I've made clear throughout my writings, I advocate free banking. My mention of Glass-Steagall was in the context of the central bank that we've got, not in the context of some wished-for but non-existent free-banking regime. An entire chapter of my book is about free banking! It is absurd for the Mises Institute to pick this one sentence off my website, completely out of context, and write:

Originally Posted by Onion Eater

"He's clearly not a liberterarian as he makes it clear a number of times that he thinks government intervention is most obviously required and necessary for the welfare of people. These sort of comments make me far more dubious of his work. He clearly lacks an understanding of the free market."

Source: Axiomatic Economics - The Mises Community

So, in the context of the central bank that we've got, an exchange is an exchange: It is not fair for banks to keep the part of this legislation that they like, having Uncle Gravy standing ready to bail them out, while simultaniously undermining and eventually repealing the part that they don't like, the rules seperating commercial and investment banks.

That is like an uninsured teenage driver who has a wreck and, after beseeching his rich uncle for help, is granted that help, but with restrictions. His uncle will pay for the damages and put the insurance in his name but, in exchange, the boy must follow a number of rules: pay for the insurance, no drinking and driving, no driving at night, no more than one passenger at a time, etc.

Over time, the boy decides that he likes the first part, getting bailed out for his accident and having insurance, which he could not have gotten on his own, but all of those rules are just SO burdensome. So he lobbies for and eventually gets repeal of the agreement. But, by "repeal," he just means that he won't have to follow all those rules anymore. He still expects and - because his uncle is such a softie - gets to keep the part of the agreement that he likes and which is the only reason that he was able to continue driving at all after his accident.

Not fair!