"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. ... It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
-- Adam Smith
I need to give more thought as to whether Glass-Steagall is the only or best approach for dealing with risk associated with non-banking or investment activities or whether options might be reasonable alternatives. Had it not been repealed in 1999, I would probably have left it in place, as I don't believe the arguments for its repeal were sufficiently strong.
As it is no longer in place, one can assess whether it, some alternative, or some combination that it includes its provisions would be most effective for dealing with the risks of today's financial system. Innovation has led to many more opportunities and risks, and what might have worked well following the Great Depression in what was still a commercial bank-dominated financial system might not be quite as effective in today's system with its many "non-bank" institutions, greater linkages, and proliferation of instruments.
Thanks Don. Appreciate your thoughtful comments.
The old regulations certainly hurt profits and innovation, I doubt bundled mortgages would have been as huge a success as they were, and huge bomb once the 'good' mortgages were contaminated with junk ones, if firewalls had been left in place. Allowing shadow banks to hold paper and loan on it, sometimes in so convoluted a way that not even the inventors understood the process, created a 'someone must be keeping track' mentality as well as a highly competitive field that pushed investment companies to take increasingly bigger risks to maintain a rate of return that draws investors. Couple that with huge trades being done by triggers mostly with no adult supervision and it starts to look like casino capitalism.
There are few if any experts who point to derivative trading at the banks ( AIG certainly) as the thing that got them in trouble.
The major things that helped cause the problem in my view, Federal agencies, Fannie,Freddie and FHA, too much concentration of assets in too few firms and rating agencies were not addressed. It seems that the law was intended to punish people we were mad ar rather than fix a problem.
“And I have no doubt that every new example will succeed, as every past one has done, in shewing that religion & Govt will both exist in greater purity, the less they are mixed together.”
~ James Madison, letter to Edward Livingston, July 10, 1822